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By  JAMES  E.  BOYLE,  Ph.  D. 
PROFESSOR  OF  RURAL  ECONOMY. 
College  of  Agriculture,  Cornell  University 


AUTHOR  OF: 

Agricultural  Economics 

The  Financial  History  of  Kansas 

Rural  Problems  in  the  United  States 

Speculation  and  the  Chicago  Board  of  Trade 


V-".  ■' 


The  Chicago  Board  of  Trade 

What  It  Is  and  What  It  Does 

By  JAMES  E.  BOYLE,  Ph.D. 

Professor  of  Rural  Economy,  College  of 

Agriculture,  Cornell  University 

Copyright,   1921,   by  James  E.   Boyle. 

CHAPTER  I. 

ECONOMIC   FUNCTIONS  OF  A   MARKET. 

GRAIN  dealers  and  tax  collectors  are 
now  and  always  have  been  two  very 
unpopular  members  of  our  economic 
society.  In  spite  of  all  efforts  to  abolish 
them,  however,  no  successful  substitutes 
have  yet  been  found.  Thus,  Lysias,  the 
Greek  orator,  made  a  speech-  in  Athens,  300 
years  before  Christ,  against  the  grain  deal- 
ers there  on  trial.  He  spoke  for  the  con- 
sumers of  Athens,  and  every  word  of  his 
great  speech  has  been  preserved  and  handed 
down  to  us.  The  burden  of  his  complaint 
was  that  wheat  was  too  dear  for  the  city 
consumers,  and  for  this  unhappy  situation 
the  grain  dealers  should  be  put  to  death. 
From  that  day  to  this  we  have  had  two  re- 
curring complaints  against  the  grain  deal- 
ers :     First,  by  the  consumers  that  prices 


ivil8G254 


:2"  '**     '  tiiic\Gb  'board  of  trade 

were  too  high;  second,  by  the  producers  that 
prices  were  too  low.  And  since  blame  had 
to  be  placed  on  some  one,  the  ^'middleman" 
has  been  the  scapegoat.  And  now  that  in 
the  last  fifty  years  the  grain  market  has 
come  to  be  organized  in  great  central  grain 
exchanges  this  particular  piece  of  market 
machinery — the  Grain  Exchange — is  re- 
ceiving the  centuries-old  criticisms. 

Now  these  critics  sometimes  agree  on  one 
thing,  and  that  is,  in  holding  the  marketing 
machinery,  rather  than  general  market  con- 
ditions, responsible  for  changes  in  price 
levels.  Thus  the  city  consumers  were  dis- 
pleased by  the  tremendous  rise  in  wheat 
prices  beginning  in  1916,  and  lasting  up 
into  1920;  consequently  they  blamed  the 
grain  exchanges;  and  prevailed  upon  Con- 
gress and  the  President  to  expend  several 
hundreds  of  thousands  of  dollars  of  the 
public  money  in  investigating  the  grain 
trade,  through  the  Federal  Trade  Commis- 
sion and  the  Bureau  of  Markets.  Then 
with  the  general  drop  in  all  prices  late  in 
1920  following  the  World  War,  the  produc- 
ers of  wheat  placed  the  blame  for  the  fall 
in  wheat  prices  on  the  grain  marketing  ma- 
chinery and  called  for  another  investigation 
by  the  Federal  Trade  Commission.  How- 
ever, these  various  critics  do  not  agree 
among  themselves  as  to  exactly  what  the 
market  does  do,  or  how  it  does  it,  or  what 
it  should  do. 

Thus  a  prominent  farmer,  president  of  his 
local  farm  bureau,  recently  propounded 
these  three  questions  to  the  Secretary  of 
the  Chicago  Board  of  Trade: 


CHICAGO  BOARD  OF  TRADE  3 

1.  "Why  are  wheat  prices  always  forced 
down  in  the  fall?" 

2.  "Why  is  a  bushel  of  wheat  not  worth 
as  much  one  day  as  another?" 

3.  "Why  is  there  three  times  as  much 
profit  made  on  a  bushel  of  wheat  after  it 
leaves  a  farmer's  hands  as  the  farmer 
made?" 

While  these  are  all  important  indictments 
of  our  marketing  machinery  and  deserve 
an  answer  (and  will  be  fully  answered  in 
the  following  pages),  yet  they  are  not  so 
important  as  this  question :  What  should  a 
market  be  and  what  should  a  market  do? 
On  the  answer  to  this  question  all  thought- 
ful critics  agree. 

The  economic  function  of  a  market  is  to 
register  a  price  which  correctly  reflects  sup- 
ply and  demand  influences.  A  free,  open, 
competitive  market  price  should  and  does 
reflect  supply  and  demand. 

The  cost  of  production  governs  supply. 
Utility  governs  demand.  And  utility  plus 
scarcity  determines  value.  Cost  of  produc- 
tion, therefore,  does  not  determine  value, 
but  is  one  factor  in  determining  value.  Sup- 
ply and  demand  determine  value.  -Price  is 
value  expressed  in  terms  of  money.  A  fair 
price  is  the  equilibrium  price  which  bal- 
ances production  and  consumption,  which 
balances  supply  and  demand.  The  correct 
price  is,  therefore,  the  price  which  will  move 
the  whole  crop  into  consumption,  without  a 
shortage  and  without  a  carryover.  A  low 
price  (following  a  big  crop)  increases  con- 
sumption and  curtails  production.  A  high 
price  (following  a  short  crop)  stimulates 
production  and  curtails  consumption. 


4  CHICAGO   BOARD  OF   TRADE 

Having  now  set  up  a  standard  or  ideal  by 
which  to  judge  of  the  market  let  us  apply 
this  test  to  that  particular  market,  known 
as  the  Chicago  Board  of  Trade.  And  in  ap- 
plying this  test  let  us  frankly  face  the  fact 
that  the  forces  of  supply  and  demand  are 
working  through  human  agencies,  powerful 
and  alert  human  agencies,  these  on  one  side 
wanting  and  seeking  lower  prices;  those  on 
the  other  side  wanting  and  seeking  higher 
prices.  ''Bargaining  Power,"  in  short,  must 
be  recognized  as  doing  its  utmost  to  thwart 
the  "free,  open  and  competitive"  workings 
of  the  law  of  supply  and  demand.  In  the 
next  chapter  we  will  examine  the  physical 
facts  which  make  Chicago  a  grain  market; 
in  the  third  chapter  we  will  explain  the 
market  machinery  of  the  Chicago  market; 
in  the  fourth  chapter  we  will  apply  the 
above  economic  tests  of  a  market  to  the 
workings  of  this  machinery  and  see  whether 
or  not  the  Chicago  Board  of  Trade  can 
fairly  meet  these  tests. 


CHICAGO  BOARD  OF  TRADE 


CHAPTER   2. 
CHICAGO  AS  A  GRAIN    MARKET. 

A  GLANCE  at  the  Census  map  of  the 
United  States  furnishes  one  reason 
why  Chicago  is  America's  largest 
grain  market.  It  will  be  seen  from  this 
map  that  the  ^'center  of  production"  of 
wheat,  oats,  corn  and  other  grains  has  been 
traveling  steadily  westward  for  many  dec- 
ades. Now  the  center  of  wheat  production 
is  in  Iowa,  some  300  miles  from  Chicago; 
oats,  also  in  Iowa,  200  miles  from  Chicago ; 
corn,  in  Illinois,  200  miles  from  Chicago. 
Added  to  this  fact  of  geographic  location  in 
the  heart -of  the  world's  greatest  agricultural 
empire  is  the  unparalleled  system  of  trans- 
portation by  lake  and  rail.  About  400,- 
000,000  bushels  of  grain  are  received  at  Chi- 
cago each  year. 

This  is  a  large  volume  of  grain.  But  a 
still  larger  volume,  in  total  aggregate,  now 
flows  to  the  rival  markets  in  the  same  area. 
These  competitors  are,  ranked  in  order  of 
importance,  Minneapolis,  Duluth,  St.  Louis, 
Kansas  City,  Milwaukee,  Omaha,  Peoria, 
Toledo,  Detroit.  These  rival  ^markets  take 
each  year  a  total  of  some  800,000,000 
bushels.  The  receipts  of  grain  at  Chicago 
are  still  double  those  of  her  nearest  rival. 
There  is  only  one  force  which  will  move 
this  vast  volume  of  grain  to  Chicago,  name- 
ly, the  Chicago  price. 

COMPETING  MARKETS. 

These  cities  named  above,  and  many 
smaller  ones  known  as  "interior  markets," 


O  CHICAGO   BOARD  OF  TRADE 

have  established  grain  exchanges  of  their 
own.  While  there  are  now  some  forty  grain 
exchanges  in  the  United  States,  counting 
big  and  little,  the  following  are  those  which 
come  into  most  direct  competition  with  Chi- 
cago: Minneapolis  Chamber  of  Commerce; 
Duluth  Board  of  Trade;  St.  Louis  Mer- 
chants Exchange;  Kansas  City  Board  of 
Trade;  Milwaukee  Chamber  of  Commerce; 
Omaha  Grain  Exchange;  Peoria  Board  of 
Trade;  Toledo  Produce  Exchange;  Detroit 
Board  of  Trade;  Cleveland  Grain  and  Hay 
Exchange;  Cincinnati  Grain  and  Hay  Ex- 
change; Indianapolis  Board  of  Trade;  Lit- 
tle Rock  Board  of  Trade;  St.  Joseph  Grain 
Exchange;  Atchison  Board  of  Trade;  Fort 
Worth  Grain  and  Cotton  Exchange ;  Louis- 
ville Board  of  Trade;  Memphis  Merchants 
Exchange;  Topeka  Board  of  Trade;  Wich- 
ita Board  of  Trade;  Salina  Board  of  Trade; 
Hutchinson  Board  of  Trade;  Oklahoma 
City  Board  of  Trade;  Enid  Board  of 
Trade ;  Houston  Grain  and  Hay  Exchange ; 
Denver  Grain  Exchange;  Sioux  City  Grain 
Exchange;  Superior  (Nebraska)  Board  of 
Trade;  Des  Moines  Board  of  Trade;  Cairo 
Board  of  Trade;  Lincoln  Grain  Exchange. 
As  illustrating  the  aggressive  nature  of 
the  competition  of  these  interior  markets 
two  cases  may  be  cited,  Lincoln  and  Des 
Moines.  In  the  fall  of  1920,  in  certain  grain 
papers,  full  page  advertisements  of  these, 
and  other  markets,  appeared.  The  Lincoln 
Grain  Exchange  advertisement  made  the 
following  claims:  Federal  inspection; 
Official  weights;  Railway  facilities;  Tribu- 
tary to  producing  area;  Storage  facilities; 
Flour   milling    facilities;    Grain    industries 


CHICAGO   BOARD  OF  TRADE  7 

(meal,  hominy,  feed,  macaroni  products, 
etc.)  ;  finally,  the  Grain  and  Milling  mter- 
ests  "have  organized  the  Lincoln  Grain  Ex- 
change/' Similarly  the  Des  Moines  Board 
of  Trade  in  the  same  paper,  set  forth  the 
following  advantages  of  this  central  Iowa 
market:  Geographical  center  of  grain 
area;  Transportation  system;  Inspection 
and  Weighing  facihties;  finally,  "back  of 
Des  Moines'  great  natural  advantages  ... 
the  Des  Moines  Board  of  Trade."'  It  is 
worthy  of  note  in  passing  that  these  two 
grain  exchanges  lay  special  stress  on  the 
advantages  to  a  shipper  in  dealing  with  an 
organized  market.  There  is  obviously  a 
protection  here  to  the  country  shipper  which 
is  conspicuously  lacking  on  the  unorganized 
market.  It  may  here  be  stated  positively, 
without  fear  of  successful  contradiction, 
that  the  grain  trade  as  now  conducted  is 
one  of  the  most  competitive  businesses  in 
the  United  States. 

At  this  point  we  are  ready  to  look  at  the 
Chicago  Board  of  Trade  as  a  piece  of  mar- 
ket machinery. 

iQuoted  from  the  Cooperative  Manager  and 
Farmer,   November,   1920,   pp.   13,   27. 


CHICAGO   BOARD  OF   TRADE 


CHICAGO  BOARD  OF  TRADE 


CHAPTER  3. 

MARKET   MACHINERY  OF  THE  BOARD  OF 
TRADE. 

LIKE  all  important  grain  exchanges,  the 
Chicago  Board  of  Trade  is  a  corpora- 
tion. It  holds  its  charter  from  the 
State  of  Illinois  and  is,  of  course,  subject 
to  the  laws  of  that  State.  The  Board  itself 
does  no  trading.  It  has  no  interest  in  price 
changes.  The  Board  of  Trade  merely  fur- 
nishes (i)  a  place  to  trade;  (2)  rules  of 
trading;  (3)  market  information.  The 
members  as  individuals  trade  with  one  an- 
other, either  as  principals  or  as  agents  for 
thousands  of  outsiders. 

EQUIPMENT. 

The  Board  furnishes  a  building  for  trad- 
ing purposes.  The  trading  room,  144  by 
161  feet,  has  large  windows  to  furnish  am- 
ple light  for  the  52  cash  grain  tables  (some 
of  them  accommodating  four  traders  each) 
ranged  along  the  east  side.  There  are  four 
circular  "pits"  to  accommodate  those  en- 
gaged in  future  trading.  Elaborate  means 
are  employed  to  secure  and  disseminate 
market  information  rapidly  and  accurately, 
to  all  interested.  There  are  about  100  tele- 
phones and  150  telegraph  instruments  on 
the  trading  floor.  Large  blackboards  display 
the  latest  information  about  grain  prices  in 
all  other  important  markets;  Exports;  Im- 
ports; Visible  supply;  Movements  of  grain 
(receipts  and  shipments)  ;  In  and  out  in- 
spection at  Terminal  Elevators.  A  large 
weather    map,    furnished    by    the    United 


lO       CHICAGO  BOARD  OF  TRADE 

States  Department  of  Agriculture,  shows 
each  morning  the  country's  weather — wind 
direction,  precipitation,  clear  or  cloudy,  and 
barometer.  In  short,  the  market  informa- 
tion discloses  the  factors  affecting  either 
supply  of  or  demand  for  grain.  All  trad- 
ers on  the  floor  are  trading  with  their  eyes 
wide  open.  Utmost  publicity  is  given  to  the 
many  supply  and  demand  factors. 

OBJECTS. 

The  objects  of  the  Board  of  Trade  are 
set  forth  in  its  rules,  as  follows: 

(i)   To  maintain  a  commercial  exchange. 

(2)  To  promote  uniformity  in  the  cus- 
toms and  usages  of  merchants. 

(3)  To  inculcate  principles  of  justice  and 
equity  in  trade. 

(4)  To  facilitate  the  speedy  adjustment 
of  business  disputes. 

(5)  To  acquire  and  to  disseminate  valu- 
able commercial  and  economic  information. 

(6)  To  secure  to  its  members  the  bene- 
fits of  cooperation  in  the  furtherance  of 
their  legitimate  pursuits. 

RULES. 

There  is  no  secrecy  about  the  rules  of 
this  organization.  They  are  published  in 
full  in  the  large  Annual  Report  of  the  Board 
of  Trade  and  in  that  form  distributed  to  all 
libraries  and  institutions  interested.  They 
are  also  published  in  booklet  form  and  dis- 
tributed to  grain  dealers,  shippers,  farmers, 
and  other  parties  making  requests  for  them. 
The  charter  of  the  Board  gives  it  certain 
general  powers.  But  the  rules,  as  grown 
up  during  the  past  sixty  years  and  more, 
represent  the  actual  regulations  under  which 


CHICAGO  BOARD  OF  TRADE       II 

the  Board  governs  its  affairs.  The  rules  are 
adopted  by  the  members,  by  a  majority 
vote,  and  are  constantly  being  changed  from 
year  to  year  to  meet  new  conditions.  The 
Initiative  and  Referendum — now  so  popu- 
lar as  a  democratic  system  of  law  making — 
has  been  in  use  on  the  Board  for  a  much 
longer  period  than  it  has  in  any  of  our 
States.  The  administrative  work  of  the 
corporation  is  left  with  its  board  of  i8  di- 
rectors, and  with  the  various  committees. 
Among  the  most  important  committees  may 
be  named  the  following:  Committee  on 
Arbitration  (to  hear  and  settle  business 
disputes,  swiftly,  cheaply,  justly)  ;  Mem- 
bership Committee  (to  approve  applications 
for  membership  and  recommend  them  to  the 
board  of  directors)  ;  Warehouse  Commit- 
tee (to  see  that  public  storage  facilities  are 
meeting  public  needs) ;  Market  Report 
Committee  (to  see  that  no  rumors  or  false 
news  of  any  kind  get  into  circulation  and 
that  attempts  to  manipulate  the  market  by 
these  means  be  frustrated  and  punished). 

MEMBERSHIP. 

The  two  conspicuous  things  about  the 
membership  here  are  ( i )  the  large  number 
of  members — over  1600;  and  (2)  the  many 
and  conflicting  interests  represented  by  the 
membership.  The  large  number  of  mem- 
bers makes  domination  of  the  Board  by  any 
small  clique  or  combine  extremely  difficult 
if  not  impossible.  About  1200  bf  these 
members  live  in  Chicago,  while  the  other 
400  live  in  some  32  different  States  or  coun- 
tries. This  wide  scatterment  would  make  a 
"combine"  all  the  more  difficult.  There  is 
no  limit  to  the  number  of  members.    Again, 


12       CHICAGO  BOARD  OF  TRADE 

these  members  represent  the  producers  and 
consumers  in  about  equal  numbers.  About 
lOO  firms — and  this  list  includes  the  oldest 
firms  on  the  Board — are  Receivers  and 
Shippers,  i.e.,  primarily  Commission  Mer- 
chants who  receive  consigned  grain  from 
the  country  and  sell  it  on  a  commission 
basis.  Their  interests  are  bound  up  with 
the  producers  and  the  country  shippers. 
They  seek  the  highest  possible  price.  Their 
trade  comes  from  two  classes  of  shippers — 
independent  elevators  and  farmers'  eleva- 
tors. Fifty-six  per  cent  of  the  grain  re- 
ceived at  Chicago  comes  from  farmers'  ele- 
vators. Another  group  reaching  out  into 
the  country  is  the  line  elevator  company. 
This  group  also  seeks  to  sell  at  high  prices. 
The  big  millers,  the  exporters,  the  feed 
men,  the  maltsters,  the  oats  products  houses, 
the  corn  products  people,  all  seek  to  buy  at 
a  low  price.  The  most  powerful  single 
group  is  the  terminal  elevator  group,  hav- 
ing the  advantages  of  large  capital,  great 
credit,  and  huge  storage  facilities.  This 
group,  however,  is  both  a  buyer  and  seller 
of  grain  and  so  cannot  be  counted  on  to 
line  up  with  either  the  high-price  sellers  or 
low-price  buyers. 

farmers'  memberships. 

No  farmers'  company  has  ever  been  re- 
fused membership  in  the  Board  of  Trade. 
Like  any  other  company,  it  is  required  to 
have  financial  stability,  good  character,  and 
must  agree  to  obey  the  Rules  of  the  Board. 
At  present  there  are  two  farmers'  compa- 
nies holding  membership — one  is  in  Illinois, 
and  one  is  in  Canada — a  subsidiary  of  the 


CHICAGO  BOARD  OF  TRADE       13 

powerful  United  Grain  Growers,  the  largest 
cooperative  concern  in  North  America. 

THE  ANTI-REBATE  RULE. 

One  practical  difficulty  in  the  way  of 
some  farmers'  cooperative  concerns,  as  now 
organized,  in  obtaining  membership  on  the 
Board  of  Trade  is  the  board  rule  forbidding 
any  commission  firm  to  rebate  any  part  of 
the  regular  commission  back  to  the  country 
shipper.  This  is  to  guarantee  competition 
on  an  equal  footing  by  all  members  when  it 
comes  to  selling  grain.  This  rule,  of  course, 
is  in  conflict  with  the  "patronage  dividend" 
in  use  by  some  country  elevator  companies. 
Farmers'  companies,  however,  can  find  a 
way  around  this  rule,  if  they  desire  to,  by 
a  proper  distribution  of  their  stock  on  the 
basis  of  the  business  done.  Or  there  is  one 
other  way  around  this  rule,  and  that  is  for 
enough  farmers'  companies  to  join  the 
Board  to  form  a  strong  block  of  votes ;  then 
by  securing  adherents  from  other  interests 
to  have  the  anti-rebate  rule  altered  or  re- 
pealed. 

COST  OF  MEMBERSHIP. 

It  IS  customary  for  new  members  to  buy 
memberships  from  retiring  members  or 
from  the  estates  of  deceased  members. 
Memberships  for  sale  are  posted  on  the 
bulletin  board  and  go  to  the  highest  bidder 
who  can  meet  the  membership  requirements. 
The  market  price  is  around  nine  or  ten  thou- 
sand dollars  a  membership.  There  are  loo 
or  more  transfers  every  year. 

SUMMARY. 

The  Board  of  Trade  as  a  corporation  fur- 
nishes  certain   market   machinery    for   the 


14       CHICAGO  BOARD  OF  TRADE 

dse  of  its  members.  This  corporation  is 
governed  under  democratic  rules  of  self- 
government.  In  voting  power,  the  "small 
business  men"  greatly  outnumber  the  ''big 
business  men." 

The  way  this  market  machinery  operates 
will  be  discussed  in  the  next  chapter. 


CHICAGO  BOARD   OF  TRADE       I5 

CHAPTER  4. 

HOW  THE  MARKET  MACHINERY  WORKS. 

AT  first  glance  the  test  of  registering 
supply  and  demand  looks  like  a  sim- 
ple one  indeed.  A  prominent  mem- 
ber of  one  of  our  agricultural  colleges,  for 
instance,  recently  published  this  statement 
in  a  bulletin:  "The  demand  for  wheat  is 
fairly  constant  and  the  supply  can  easily  be 
ascertained  these  days  with  telegraphs,  ca- 
bles and  wireless.  Then  why  not  a  fairly 
steady  price  for  wheat  based  on  supply  and 
demand?"  But  the  subject  is  not  so  simple 
as  that.  A  little  effort  at  honest,  clear,  and 
sustained  thinking  will  show  the  complex 
nature  of  the  subject.  The  first  question  is, 
What  is  supply?  Is  it  the  crop?  If  so,  no 
one  knows  exactly  what  that  is,  and  even 
the  Government  crop  estimates  change  from 
month  to  month.  Does  it  include  the  carry- 
over from  the  old  crop,  and  if  so,  how  much 
is  that?  Does  it  include  the  crop  in  the 
rest  of  the  world,  particularly  of  our  five 
biggest  competitors — Canada,  Argentina, 
Australia,  India,  and  Russia  ?  But  here  the 
new  crop  is  being  harvested  (in  one  or  more 
countries)  every  day  in  the  year,  so  that  the 
"supply,"  meaning  the  "crop,"  is  literally 
changing  every  day  in  the  year.  Traders  do 
not  face  the  actual  supply,  but  the  estimates 
of  the  supply,  and  these  estimates  change 
daily — even  hourly — with  new  information. 
As  a  matter  of  fact  "receipts"  at  the  mar- 
ket constitute  a  more  important  "supply" 
factor  than  the  "crop,"  and  back  of  "re- 


i6 


CHiCACO   BOARt)  OF  TRADE 


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CHICAGO  BOARD  OF  TRADE  1^ 

ccipts"  is  the  so-called  "visible  supply"— ^ 
,i;rain  actually  in  terminal  elevators.  Back 
of  this  is  the  estimated  holding  in  country 
elevators  (some  20,000  of  these  houses)  ; 
and  back  of  these  is  the  estimated  holding 
on  the  farms  (some  two  or  three  million  of 
these).  But  the  farm  holdings  are  partly 
for  seed  and  feed,  and  hence'  are  a  very 
indefinite  "supply''  factor.  Indeed,  the 
farmer  himself  may  change  his  mind  about 
the  amount  of  wheat  he  will  sell  and  the 
time  he  will  sell.  Obviously,  then,  the  "sup- 
ply" of  merchantable  grain  which  may 
come  to  the  market,  which  is  important  in 
price  making,  is  not  definitely  known,  and 
must  be  estimated  from  day  to  day  by  the 
trade  according  to  available  information. 

Neither  is  the  demand  "fairly  constant," 
as  the  bulletin  quoted  claims.  The  biggest 
buyers  are  the  millers,  since  most  wheat 
goes  into  bread.  Thus  the  consumption  of 
wheat  by  American  mills  in  July,  August, 
September  and  October  of  1920  was  50,- 
000,000  bushels  less  than  for  the  same  pe- 
riod of  1919.  Flour  sales  had  fallen  off, 
and  wheat  purchases  fell  off  accordingly. 
Again  the  exporters  are  important  buyers, 
since  they  take  our  surplus  and  it  is  the  sur- 
plus which  so  largely  determines  the  price 
of  the  whole  crop.  Thus  the  largest  over- 
seas buyer  of  American  wheat  bought  heav- 
ily the  first  half  of  1920.  This  buying 
stopped  absolutely  on  July  29,  1920,  and 
during  the  next  three  or  four  months  not 
another  bushel  of  American  wheat  was 
taken  by  this  buyer.  At  the  end  of 
this  period  this  buyer  was  able  to  turn 
to    Argentina    and    Australia    and  .  secure 


l8       CHICAGO  BOARD  OF  TRADE 

high-grade  wheat  below  American  prices. 
Demand  is  not  constant — quite  the  con- 
trary. Sometimes  demand  can  only  be 
stimulated  by  price  concessions;  this  is  al- 
ways true  in  the  face  of  a  big  surplus.  De- 
mand is  also  affected  by  the  use  of  substi- 
tutes and  alternates.  In  human  food,  rye 
bread,  or  substitutes  for  bread,  may  be  used 
more  freely.  For  animal  feeds,  mixtures 
containing  more  cottonseed  products,  or 
corn  or  oats  or  linseed  products  and  less 
flour  mill  by-products  may  be  used.  Stu- 
dents of  markets  and  not  of  maxims  appre- 
ciate the  wide  range  of  substitutes  and  al- 
ternates for  wheat  in  human  and  animal 
nutrition,  and  the  consequent  fluctuations  in 
the  demand  for  wheat.  When  the  world  has 
a  crop  of  3,000,000,000  bushels — as  it  often 
does — there  is  "demand"  enough  to  use  it 
all.  And  when  the  world  has  a  crop  of 
4,000,000,000  bushels — as  it  sometimes  does 
— there  is  also  "demand"  enough  to  take  it 
all.  Demand  is  and  must  be  flexible,  and  is 
in  fact  never  constant. 

THE  MARKET  TEST. 

We  have  come  far  enough  on  our  jour- 
ney to  see  that  the  "supply  and  demand" 
test  is  only  superficially  simple.  Facing  the 
realities  of  life,  we  must  admit  that  to  ap- 
ply this  test  to  any  market  in  such  a  way 
as  actually  to  find  out  the  truth  is  a  job 
that  cannot  be  done  with  statistical  and 
mathematical  accuracy.  As  a  concrete  back- 
ground to  this  market  test,  let  these  simple 
facts  as  to  the  supply  side  of  the  market  be 
borne  in  mind. 

(i)  In  the  year  1890  the  United  States 
wheat  crop  was  399,000,000  bushels. 


CHICAGO  BOARD  OF  TRADE  I9 

(2)  Ten  years  later,  with  14,000,000 
more  mouths  to  feed  in  this  country,  the 
crop  had  increased  by  122,000,000  bushels. 

(3)  Five  years  later,  with  eight  million 
more  mouths  to  feed,  the  crop  had  increased 
by  170,000,000  bushels. 

(4)  Five  years  later,  with  eight  million 
more  mouths  to  feed,  the  crop  had  fallen 
off  57,000,000  bushels. 

( 5 )  Again,  five  years  later,  with  five  mil- 
lion more  mouths  to  feed  in  the  United 
States,  the  crop  increased  by  390,000,000 
bushels. 

Truly,  both  ^'supply"  and  "demand"  are 
and  must  be  very  flexible  factors.  For  the 
output  of  farms,  unlike  the  output  of  fac- 
tories, cannot  be  definitely  controlled,  re- 
gardless of  wind  and  weather  and  insect 
pests,  to  meet  the  estimated  "demands"  of 
consumers. 

TESTING  THE  "SUPPLy"  FACTOR. 

What  constitutes  the  supply  of  wheat?  As 
just  stated  in  the  preceding  pages,  the  term 
"supply"  is  a  complex  and  difficult  one  to 
measure.  Supply  is  both  psychological  and 
physical.  It  is  psychological,  to  the  extent 
that  it  is  merely  the  buyer's  or  seller's  opin- 
ion or  estimate  of  the  amount  of  merchant- 
able wheat  on  the  market  or  ready  to  flOw 
to  the  market.  It  is  physical  to  the  extent 
that  it  is  a  definite  and  stated  number  of 
bushels  of  merchantable  wheat  for  sale.  In 
reflecting  the  purely  physical  factors  of  sup- 
ply, the  Board  of  Trade  wheat  price  re- 
flects these  three  distinct  aspects  of  supply, 
namely,  (i)  crop,  (2)  the  visible  supply, 
and  (3)  receipts  at  the  market.  Receipts 
have  the  most  immediate  effect  on  price; 


20  CttiCAGO   BOARD  OF  TRADE 


Chart  I. 

Price  of  Cash  Wheat  for  Ten  Years,  Chicago 
Board  of  Trade,  and  the  three  most  important 
physical  factors  of  supply  which  affect  price. 


CHICAGO  BOARD  OF  TRADE      21 

visible  supply  ranks  second ;  the  crop  yield, 
as  announced  monthly  by  the  United  States 
Bureau  of  Crop  Estimate  is  the  underlying 
or  third  influence  on  price  levels.  To  an- 
swer the  question,  therefore,  whether  or 
not  the  Chicago  Board  of  Trade  market 
price  for  wheat  does  correctly  reflect  the 
supply  of  wheat,  it  is  necessary  to  show 
whether  or  not  this  price  does  rise  and  fall 
with  corresponding  changes  in  these  three 
supply  factors.  This  is  best  shown  in  the 
form  of  a  graph.  Ten  normal  years  are 
taken  as  a  test,  1904  to  19 13,  inclusivCj 
years  free  from  wars  and  subject  to  one 
minor  panic.  Judged  by  this  fair  test  (see 
the  accompanying  graph)  it  is  seen  that 
the  price  of  wheat  on  the  Chicago  Board  of 
Trade  does  follow  the  law  of  supply  and 
demand  (Chart  I). 

THE  LIVERPOOL  PRICE. 

THE  Liverpool  price  of  wheat  is  of 
prime  importance,  since  it  seriously 
affects  the  ebb  and  flow  of  export 
grain  from  the  seaboard.  This,  in  turn,  at 
once  affects  the  seaboard's  bidding  on  the 
Chicago  market.  In  this  manner  Liverpool 
buying  is  reflected  back  to  the  Chicago  mar- 
ket as  a  demand  influence,  and,  also,  in  turn, 
as  an  influence  on  the  three  physical  factors 
of  Chicago  receipts  and  visible  supply. 

STATISTICAL  POSITION. 

The  statistical  position  of  the  market,  as 
it  is  called,  means  the  market  conditions, 
national  and  international,  which  are  ex- 
pressed in  definite  statistics.  In  other 
words,  it  means  the  physical  factors  which 
are  visible  and  are  matters  of  public  infor- 


22       CHICAGO  BOARD  OF  TRADE 

mation.  It  sometimes  happens,  however, 
that  the  statistical  position  may  be  "strong" 
and  the  actual  market  "weak."  This  hap- 
pened in  the  fall  of  1920.  The  statistics  in 
the  early  fall  showed  a  hungry  Europe  fac- 
ing a  very  ordinary  exportable  surplus. 
This  meant,  obviously,  a  strong  market. 
But  certain  invisible  factors,  not  shown  by 
the  statistics,  began  to  enter  in  and  spoil  the 
"strong"  market.  It  developed,  for  instance, 
that  the  biggest  buyer.  Great  Britain,  had 
quit  the  market  in  July,  for  several  months. 
This  meant  a  big  slump  in  the  demand. 
This  meant,  by  the  same  token,  a  supply  in 
excess  of  the  actual,  manifested  demand. 
In  short,  it  meant  a  fall  in  price.  No  chart 
of  statistics  showing  "Supply  and  Demand" 
can  represent  all  the  psychological  elements 
on  the  actual  market.  But  actual  market 
fluctuations  are  due  to  all  these  supply  and 
demand  factors,  both  psychological  and 
physical.  To  those  who  are  ignorant  of  ac- 
tual market  conditions  and  influences,  these 
price  fluctuations,  although  genuine  supply- 
and-demand  fluctuations,  seem  to  be  arbi- 
trary and  the  conscious  and  deliberate  work 
of  speculators  and  gamblers.  Such  a  criti- 
cism of  the  market  has  never  been  made  by 
a  man  who  has  spent  several  years  on  the 
market.  Indeed,  one  of  the  interesting 
things  about  the  Board  of  Trade  is  the 
group  of  men — none  of  them  rich — who 
have  been  active  members  there  for  fifty 
years  or  over.  These  venerable  traders  are 
very  firmly  convinced,  by  the  abundance  of 
their  experience,  that  price  fluctuations — 
even  great  changes  in  price  levels — are,  in 
fact,  due  to  natural  supply  and  demand  in-,... 


y 


CHICAGO  BOARD  OF  TRADE  ^3 

fluences.  In  this  market,  as  in  every  other 
kind  of  market,  the  powerful  bargainer  has 
a  certain  advantage  over  the  weak  bargainer, 
yet  even  the  powerful  bargainer  can  exer- 
cise but  little  and  temporary  artificial  con- 
trol over  supply  or  demand.  The  rules  of 
the  market  are,  in  fact,  made  by  the  small 
dealers  (who  are  in  the  majority)  to  protect 
themselves  against  just  such  a  possible  dom- 
ination by  large  interests.  The  same  cannot 
be  said  of  the  tobacco  or  wool  market,  for 
instance,  or  any  other  unorganized  market, 
for  there  small  groups  of  men  may  and 
often  do  dominate  the  market. 

CASH     PRICES     NOT     GOVERNED     BY     FUTURE 
PRICES. 

Following  the  re-opening  of  the  Chicago 
wheat  pit,  July  15,  1920  (after  being  closed 
about  three  years),  there  came  several 
weeks  of  a  very  narrow  market — a  market, 
that  is,  with  few  buyers  and  sellers  in  it.  A 
narrow  market  always  means  wide  fluctu- 
ations in  price,  as  explained  a  few  pages 
later  on.  Hence,  following  July  15,  1920, 
the  country  witnessed  unprecedented  price 
fluctuations  in  the  wheat  pit,  aggravated  by 
the  further  conditions  that  the  whole  world 
was  recovering  from  four  years  of  war,  and 
that  a  general  post-war  price  recession  had 
set  in.  Instead  of  the  usual  daily  range  of 
two  or  three  cents  in  future  prices  of  wheat, 
some  days  saw  a  range  of  seven  or  eight  or 
even  ten  cents. 

Before  the  World  War  we  had  what  may 
be  called  a  normal  future  market  on  the 
Chicago  Board  of  Trade.  During  the 
months  following  the  World  War  we  had 


24 


CHICAGO  BOARD  OF  TRADE 


what   may   be   called   an   abnormal    future 
market  on  the  Board  of  Trade. 

A  normal  future  market  is  one  in  which 
the  future  price  ranges  higher  than  the  cash 
by  about  the  amount  of  the  "carrying 
charge''  on  the  grain  (that  is,  storage,  in- 
surance, interest).  Such  a  normal  market 
is  illustrated  by  the  graph  below,  Chart  2, 
showing  one  week's  market  in  the  year  191 1. 


H^^:-' :'":':  ---  -         .   -:    --■-  .'_..:;:_:.,.•.:    ,    / : :.L ■..:..... .j 


Normal  Futures. 
Cash  and  Futures, 
uary  9  to  14,  1911. 


Chart  2. 

One  Week  of  Wheat  Prices, 
Chicago  Board  of  Trade,  Jan- 


An  abnormal  future  market,  is  illustrated 
by  the  graph,  Chart  3,  on  following  page, 
showing  one  week  in  October,  1920 — a  pe- 
riod of  drastic  readjustment  of  prices  and 
wages  throughout  the  world. 

The  error  back  of  much  reasoning  about 
the  Board  of  Trade  is  the  belief  that  future 
price  controls  cash  price.  And  since  the 
future  price  is  made  in  the  pit,  largely  un- 
der speculative  trading,  the  conclusion  is 
reached  that  the  cash  price  is  a  mere  foot- 
ball of  speculation.  We  have  seen,  in  the 
preceding  pages  of  this  booklet,  that  cash 


CilicAGO   BOARD  OF   TkAbE 


^5 


Chart  3. 

Abnormal  Futures.  Futures  Below  the  Cash. 
One  Week  of  Wheat  Prices,  Cash  and  Futures, 
Chicago  Board  of  Trade,  October  4  to  9,  1920. 


26       CHICAGO  BOARD  OF  TRADE 

prices  reflect  supply  and  demand  conditions. 
It  may  be  stated  at  this  point,  positively, 
that  future  price  does  not  determine  cash 
price. 

This  may  be  illustrated  by  the  price  of 
corn  during  the  crop  year  1917.  The  crop 
in  the  fall  of  19 17  was  large  in  quantity, 
but  very  poor  in  quality,  much  of  it  being 
too  wet  to  sell  at  all.  The  Food  Adminis- 
tration was  making  superhuman  efforts  to 
move  wheat  to  Europe,  and,  by  the  same 
token,  was  anxious  to  increase  the  con- 
sumption of  wheat  substitutes  at  home,  in- 
cluding cgrn.  Cash  corn  in  January,  1917, 
ranged  from  $.93  to  $1.03.  From  this  date 
on,  both  cash  and  futures  rose  in  price.  By 
July,  1918,  cash  corn  had  climbed  to  $2.32, 
a  figure  so  high  as  to  worry  the  Food  Ad- 
ministration. The  Food  Administration 
considered  the  speculative  buying  entirely 
too  large  on  the  rising  market,  and  the 
Board  of  Trade  was  called  upon  to  prevent 
a  charge  being  placed  on  the  public  by  the 
unrestrained  eventuation  of  these  contracts. 
The  Directors  of  the  Board  of  Trade,  ex- 
ercising their  own  war  powers  over  the 
activities  of  members,  set  a  maximum  price 
to  corn  futures,  namely,  $1.28.  This  action 
was  taken  on  July  11,  1918.  This  action 
held  the  futures  down  to  the  $1.28  level. 
But  did  pegging  the  futures  also  peg  the 
cash  price?  Not  so.  The  cash  price, 
buoyed  up  by  heavy  buying  orders,  contin- 
ued far  above  the  futures,  reaching  $2.36 
in  August,  $2.24  in  September,  and,  work- 
ing downward  as  the  new  crop  year  ap- 
proached, reached  $2,151^  in  October,  $2.29 
in  November,  and  $1.90  in  December. 


CHICAGO  BOARD  OF  TRADE       27 

This  illustration  of  cash  corn  moving 
wholly  regardless  of  future  prices  may  be 
supplemented  by  the  examples  of  all  future 
prices  during  the  World  War,  when  cash 
prices  were  continuously  above  futures,  in- 
stead of  below.  In  other  words,  upset  con- 
ditions of  transportation,  markets,  etc., 
placed  a  premium  on  cash  grain. 

The  conclusion  is  evidently  warranted 
that  neither  future  nor  cash  price  has  a 
dominating  influence,  permanently,  over  the 
other.  Both  are  merely  effects  of  supply  and 
demand  causes. 

TWO  KINDS  OF  TRADING. 

Notwithstanding  the  fact  that  there  are 
.several  hundred  million  bushels  of  cash 
grain  handled  through  the  Board  of  Trade 
every  year,  public  attention  is  centered  al- 
most wholly  on  the  future  trading  which  is 
going  on  there  at  the  same  time.  At  this 
point  it  is  necessary  to  define  each  kind  of 
trading,  and  show  the  relation  of  the  one 
to  the  other.  Cash  grain  means  the  grain 
actually  on  hand  ready  for  delivery.  Fu- 
ture trading  is  dealing  in  grain  contracts,  the 
grain  covered  by  the  contract  to  be  deliv- 
ered at  some  future  date.  The  regular 
future  delivery  months  for  wheat  are  Sep- 
tember, December,  May,  and  July.  Some 
speculate  in  cash  grain;  some  in  futures. 
The  bulk  of  speculation  is  in  futures. 

INTERRELATIONSHIP  OF  CASH   AND  FUTURES. 

The  future  market  is  used  by  two  dis- 
tinct classes  of  persons:  by  those  who  use 
it  for  speculation  only;  by  those  who  use 
it  to  avoid  speculation.  This  latter  class  in- 
cludes the  cash  grain  interests,  to  a  very 
large  extent,  particularly  those  who  wish  to 


28       CHICAGO  BOARD  OF  TRADE 

introduce  certainty  and  stability  into  their 
business.  To  illustrate  this  truth  it  is 
necessary  to  explain  ^'hedging/' 

HEDGING. 

Standing  on  the  edge  of  the  Chicago  oats 
pit  one  day  in  the  fall  of  19 17,  I  noticed 
Mr.  E.  W.  Bailey  step  into  the  pit  and  sell 
two  cars  of  oats  for  December  delivery. 
He  explained  the  transaction  as  a  hedge. 
He  had  just  bought  two  cars  of  cash  oats, 
after  looking  over  the  samples  displayed  by 
the  various  receivers  and  shippers  of  cash 
grain.  These  two  cars  were  ordered  sent  to 
his  mill  in  Vermont.  Fearing  a  loss  by  a 
drop  in  price  before  these  oats  should  reach 
destination,  and  not  wishing  to  assume  the 
speculative  risk  of  either  a  profit  or  loss 
through  price  fluctuation,  he  sold  two  cars 
of  oats  to  a  speculator  in  the  pit  who  did 
want  to  assume  a  risk.  Since  this  pit  trade 
made  Bailey's  books  balance — being  ''long" 
and  "short"  exactly  the  same  amount,  he 
had  no  further  interest  in  price  changes. 
For  any  loss  on  one  side  would  be  offset  by 
a  gain  on  the  other  side.  Thus  if  the  oats 
should  rise  in  price  10  cents  by  the  time  the 
Vermont  mill  had  passed  them  on  to  the 
consumer,  Bailey  would  realize  a  lo-cent 
profit  (in  addition  to  his  regular  milling 
margin)  on  his  cash  oats.  But  as  soon  as 
his  cash  oats  were  sold,  he  would  enter  the 
pit  and  buy  in  his  hedge,  losing  10  cents  on 
it.  It  may  be  emphasized  here  in  passing 
that  neither  Bailey  nor  any  other  miller 
ordinarily  takes  any  deliveries  of  grain  on 
future  contracts.  They  close  out  the  con- 
tract before  the  delivery  month  by  selling  in 
the  pit  what  they  have  bought  in  the  pit,  or 


CHICAGO  BOARD  OF  TRADE       29 

buying  in  the  pit  what  they  have  sold  in  the 
pit.  This  universal  practice  helps  shed 
some  light  on  the  large  volume  of  futures  as 
compared  with  cash  sales.  The  big  miller, 
quite  obviously,  meets  his  actual  milling  re- 
quirements— grades,  varieties,  blends,  etc. — 
by  buying  cash  grain  from  the  samples  on 
the  trading  floor.  Hence  he,  has  no  need  of 
taking  deliveries  on  futures,  since  they  have 
served  his  purpose  already  by  insuring  him 
his  milling  profits. 

This  concrete  case  of  Bailey  is  given  in 
some  detail  because  it  is  typical  of  a  very 
large  class  of  cash-and-future  transactions 
on  the  Board  of  Trade.  Bailey,  without 
the  hedge  in  the  future  market,  could  and 
would  have  hedged  in  another  way  (such  as 
is  done  in  barley),  that  is,  paid  less  for  the 
grain  or  sold  it  for  more,  or  both.  In  other 
words,  he  would  have  worked  on  a  larger 
margin.  Wheat,  oats,  and  corn,  thanks  to 
hedging  in  the  future  market,  are  now 
handled  in  the  United  States  by  the  estab- 
lished dealers  at  the  lowest  margin  of  any 
farm  product. 

As  the  miller  uses  the  hedge,  so  do  alsa 
the  country  elevator  managers,  the  termi- 
nal elevators,  and  the  exporters.  Thus  the 
country  elevator  manager,  filling  his  house 
with  cash  grain,  already  paid  for,  sells  it 
for  future  delivery.  In  September  he  is 
likely  selling  for  December  delivery.  As 
his  cash  grain  reaches  the  terminal  and  is 
bought  and  paid  for  by  terminal  elevator, 
miller,  exporter,  or  industry,  he  buys  in  his 
hedge.  The  cash  buyer,  whoever  he  may  be, 
if  he  IS  a  representative  grain  dealer,  pro- 
ceeds to  hedge  in  a  similar  manner.    Thus, 


30 


CHICAGO   BOARD  OF  TRADE 


o 

pq 


H 


CHICAGO  BOARD  OF  TRADE       3I 

the  cash  grain  interests  are  constantly  in 
and  out  of  the  pit,  trading  with  the  specu- 
lators there,  in  order  to  avoid  speculation 
themselves.     This  has  two  direct  benefits 
for  the  cash  grain  interests.     They  work 
on  a  narrower  margin  (pay  the  producers 
more  or  charge  the  consumer  less)  ;  they 
are  financed  at  lower  rates  by  the  banks. 
On  this  first  head,  wheat  and  barley,  before 
future  trading  in  barley  was  estabhshed,  are 
a  case  in  point.  To  give  a  concrete  illustra- 
tion from  a  South  Dakota  country  elevator. 
Wheat  subject  to  future  trading,  is  handled 
on  a  definite  and  narrow  margin ;  barley  was 
handled  on  a  margin  just  three  times  as 
large.    If  the  barley  could  have  been  hedged, 
the  farmer  would  have  received  more  for  his 
barley.  And  on  the  second  head,  it  may  be 
stated  that  the  large  banks,  in  financing  cash 
grain,  feel  that  the  loan  has  greater  certainty 
and  stability  when  the  grain  is  hedged  in  the 
pit.    It  is  true  that  some  large  banks  loan 
against  bills  of  lading,  looking  to  the  railroad 
company  for  the  value  of  the  wheat  in  case 
the  shipment  is  lost  or  destroyed  in  transit ; 
or  these  banks  may  loan  to  terminal  eleva- 
tors against  warehouse  receipts  protected  by 
grain   insurance.      However,    in    either    of 
these  cases  there  still  remains  a  speculative 
hazard  due  to  change  in  price  of  the  grain 
and  the  bank  must  charge  for  this  hazard 
in  its  interest  rate.     This  speculative  risk, 
however,  many  banks  prefer  to  see  shifted 
to  the  shoulders  of   the  speculator.     The 
testimony  of  one  of  the  most  experienced 
bankers   in   the  grain   belt   is   valuable   as 
throwing   light   on   this   whole   subject   of 
financing  the  grain  trade : 


32       CHICAGO  BOARD  OF  TRADfi 

David  R.  Forgan,  President  of  the  Na- 
tional City  Bank  of  Chicago,  stated  the 
matter  in  these  words:  "Warehouse  re- 
ceipts for  grain  or  anything  else  that  finally 
becomes  human  food  are,  in  my  opinion, 
the  best  possible  collaterar  for  bank  loans. 
.  .  .  The  warehouse  receipts,  therefore, 
above  alluded  to,  constitute  a  collateral 
which  is  always  available  for  the  payment 
of  debts.  Furthermore,  if  the  grain  or  pro- 
visions represented  by  the  warehouse  re- 
ceipts are  already  sold  for  future  delivery, 
that  fact  adds  a  great  element  of  strength 
to  the  loan  because  there  is  a  third  party 
obligated  to  take  the  grain  at  a  certain  time 
for  a  given  price. 

''When  I  lived  in  Minneapolis  I  had  the 
only  unpleasant  experience  I  ever  had  in 
connection  with  the  elevator  business.  A 
terminal  elevator  concern  filled  its  elevators 
with  wheat,  and  thinking  that  the  market 
was  likely  to  go  up  they  did  not  hedge  it  by 
selling  for  future  delivery.  In  other  words, 
they  speculated  on  their  wheat.  The  mar- 
ket had  a  large  and  sudden  drop  with  the 
result  that  the  elevator  concern  failed,  and 
the  bank  with  which  I  was  connected  suf- 
fered a  loss.  The  present  method,  there- 
fore, of  carriers  of  grain  or  provisions  sell- 
ing them  for  future  delivery  is  a  highly  sat- 
isfactory one  to  the  banks  whose  money  is 
loaned  to  the  carriers.  The  sale  for  future 
delivery  is  the  final  link  in  the  chain  that 
makes  such  loans  the  best  in  the  world.'' 

This  description  of  hedging,  up  to  this 
point,  has  illustrated  one  form  of  hedging 
only,  namely,  that  form  in  which  the  pure 
speculator  always  took  one  side  of  the  trade. 


CHICAGO  BOARt)  OF  TkAD£      33 

There  is  another  form  of  hedging,  also  com- 
mon, namely,  that  form  in  which  actual 
consumptive  buyers  instead  of  speculators 
take  the  buying  side  of  the  trade.  To  give 
a  concrete  illustration:  Some  cash  grain 
interests  went  into  the  pit  (in  July)  and 
sold  200,000  bushels  of  December  corn. 
The  buyer  turned  out  to  be  a  Texas  cattle 
feeder,  and  not  a  speculator.  He  held  his 
contract  till  December,  called  for  his  corn, 
and  got  it.  And,  by  the  way,  this  example 
of  a  trade  (which  actually  happened)  illus- 
trates another  very  simple  aspect  of  the 
market,  which  at  first  glance  looks  "com- 
plicated" to  the  outsider.  And  that  is  this : 
The  man  who  sold  this  200,000  bushels  of 
futures  as  a  hedge,  to  Mr.  Feeder,  later 
bought  in  his  hedge  from  Mr.  Speculator, 
thus  closing  out  his  own  futures.  And  Mr. 
Speculator,  who  was  now  short  200,000 
bushels  December  corn  was,  under  Board 
of  Trade  rules,  bound  by  an  unconditioned 
contract  to  deliver  the  corn  in  December. 
In  such  a  case  he  would  make  one  of  two 
choices :  ( i )  stand  on  the  contract  and  de- 
liver the  corn;  (2)  or  pass  on  the  contract 
to  some  other  trader  who  was  ready  to 
take  the  short  side  of  the  market.  The  fact 
remains  that  as  long  as  Mr.  Feeder  is 
"long"  200,000  bushels  December  corn, 
some  trader  is  short  that  amount,  and  the 
terms  of  the  contract  will  be  strictly  ful- 
filled. ,  And  the  further  fact  is  to  be  borne 
in  mind  that  these  trades  are  contracts,  not 
bets,  and  any  trader  who  wishes  to  receive 
grain  on  his  long  contract  will  get  it,  prop- 
erly stored  and  insured  in  a  regular  ware- 
house sometime  during  the  delivery  month. 


34       CiilCAGO  BOARD  OF  TRADE 

Is  this  process  "complicated"  ?  No  more 
so  than  that  of  many  contracts  for  large 
construction  jobs.  Thus  Engineer  A  con- 
tracts to  pave  a  street  for  $300,000.  He  is 
really  selling  labor  and  material  short,  for 
he  contracts  to  deliver  in  the  future  what 
he  does  not  now  possess.  It  is  a  speculation 
on  his  part.  He  "sublets"  the  job  to  Con- 
tractor B,  for  $275,000,  thus  obtaining  a 
profit  of  $25,000.  Contractor  B  may  pass 
on  the  contract  to  a  group  of  smaller  men — 
C,  D,  E,  and  F — at  a  total  of  $270,000,  thus 
having  a  profit  of  $S,ooo  on  his  contract. 
In  the  end  the  contract  is  fulfilled  by  the 
respective  parties  concerned  and  the  city 
gets  its  pavement,  but  not  directly  from 
Engineer  A. 

Or,  to  illustrate  by  an  example  from  the 
clothing  trade.  The  American  Cloak  Com- 
pany wants  1,000  women's  coafs.  Cohen 
sells  the  coats  for  $50,000,  that  is,  he  sells 
short,  for  he  does  not  have  any  coats,  but 
will  dehver  them  at  a  future  date.  Cohen 
now  divides  his  contract  into  ten  jobs,  and 
sells  to  ten  of  his  friends  a  contract  to  de- 
liver 100  coats  each,  at  $45.  In  turn  these 
ten  pass  on  their  contracts  to  a  number  of 
smaller  contractors  and  so  on  finally  till  the 
actual  coat  makers  are  reached.  Some  con- 
tractors may  lose  on  their  contract;  some 
may  gain.  At  any  risk  many  "short  sales" 
may  be  made  before  the  actual  goods  are  de- 
livered. Briefly,  to  sum  up,  the  man  who 
sells  coats  not  in  existence,  who  sells  pave- 
ment not  yet  constructed,  or  grain  he  does 
not  own,  is  a  short  seller,  who,  in  dealing 
in  contracts,  thereby  performs  a  service  in 
our  present  commercial  system. 


CHICAGO  BOARD  0^  tRADfi  3^ 

Again,  to  return  to  the  grain  trade,  there 
are  several  thousand  farmers  in  Iowa  and 
IlHnois  who  now  use  the  Board  of  Trade 
for  future  contracts,  to  avoid  speculative 
risks.  Thus,  in  the  late  summer  of  1920, 
their  corn  crop  being  assured  and  the  price 
for  December  being  satisfactory,  they  gave 
orders  to  grain  commission  firms  to  sell 
the  December  future.  When  December  ar- 
rived, the  price  of  corn  had  dropped  75 
cents  a  bushel,  but  they,  of  course,  delivered 
the  corn  on  their  December  sale  and  ob- 
tained their  original  December  contract 
price.  The  commission  charged  on  these 
future  trades  is  one- fourth  of  a  cent  a 
bushel.  A  similar  thing  happened  with  cer- 
tain wheat  farmers  who  sold  for  December 
delivery,  except  their  profit  was  nearly  one 
dollar  a  bushel  by  avoiding  the  post-war 
price  recession. 

The  foregoing  discussion  may  be  sum- 
marized by  saying  that  the  speculator  is  a 
middle  link  in  the  chain  of  cash  grain  trans- 
actions and  hedging  transactions.  He  is  the 
link  that  enables  the  other  two  interests  to 
avoid  speculation.  He  furnishes  the  insur- 
ance, 

LARGE  VOLUME  OF  FUTURES. 

Future  trading  is  dealing  in  grain  con- 
tracts, not  real  grain,  just  as  banking  is 
dealing  in  credit,  not  real  money.  But  it 
must  be  repeated  and  reiterated  that  credit 
is  a  promise  to  pay  money — a  grain  contract 
is  a  promise  to  pay  grain.  And  so  the  New 
York  banks  at  the  close  of  the  year  1917, 
held  net  demand  deposits  of  $3,500,000,000, 
and  a  total  of  all  reserves  of  but  $550,000,- 
000 — or  ratio  of  credit  to  real  money  of 


36 


CHtCAGE   BOAkD  OP  tRADE 


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m 

m    ^ 

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,..  1 

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i^m 

CHICAGO  BOARD  OF  TRADE      37 

Over  6  to  I,  showing  an  efficient  system 
of  commercial  banking.  So  also  the  grain 
contracts  on  the  Chicago  Board  of  Trade  in 
an  ordinary  year  greatly  exceed  in  volume 
the  amount  of  grain  in  the  country.  The 
crop  of  wheat,  corn  and  oats  in  the  United 
States  averages  5,000,000,000  bushels  an- 
nually. The  volume  of  future  trading  in 
these  grains  at  Chicago  averages  20,000,- 
000,000  a  year,  or  four  times  the  total  crop. 
As  long  as  all  future  contracts  in  grain  are 
promptly  met  at  maturity  their  total  volume 
need  have  no  fixed  proportion  to  the  cash 
grain  handled.  It  is,  in  fact,  very  much  the 
same  as  comparing  the  total  volume  of 
checks  cashed  with  the  size  of  the  gold  re- 
serve. This  proportion,  be  it  gold  or  be  it 
wheat,  is  governed  by  the  needs  of  the 
trade.  How  extremely  rare  is  a  case  where 
a  member  of  the  Board  of  Trade  fails  to 
live  up  to  his  future  contract.  Practically 
non-existent ! 

SELLING  CASH   GRAIN. 

The  above  discussion  illustrates  the  fact 
that  future  trading,  as  now  carried  on  in  the 
organized  exchanges,  is  a  part  of  cash  grain 
trading — that  part  which  furnishes  certainty 
and  stability  through  insurance.  At  this 
point  a  brief  word  must  be  said  about  an- 
other aspect  of  the  cash  grain  trade,  namely, 
how  the  farmer's  grain  is  sold. 

About  95  per  cent  of  the  grain  reaching 
the  terminal  market  has  already  passed  out 
of  the  original  farmer's  hands  into  the 
hands  of  a  country  elevator.  About  4,000 
of  the  country  elevators  in  the  Chicago  ter- 
ritory are  owned  by  farmers  collectively, 
and  the  bulk  of  the  cash  grain  reaching  Chi- 


38       CHICAGO  BOARD  OF  TRADE 

cago  comes  from  these  farmers'  elevators. 
Most  of  it  is  consigned  to  grain  commis- 
sion merchants  to  be  sold  by  them  to  the 
highest  bidder  they  can  find.  The  "toll'* 
is  I  per  cent  for  this  service.  If  the  com- 
mission merchant  is  a  skilled  salesman  (and 
the  unskilled  do  not  survive  long  on  this 
market)  he  is  at  his  table  early  in  the  morn- 
ing— a  half  hour  before  trading  begins.  He 
sees  his  samples  delivered  from  the  State 
Grain  Inspection  Laboratory,  each  in  a 
strong  paper  bag  with  the  proper  notations 
as  to  grade,  moisture  content,  dockage,  test 
weight  per  bushel.  He  sees  his  own  sam- 
ples arranged  in  order,  whether  he  has  ten 
cars  or  fifty  or  a  hundred  cars  to  sell.  He 
moves  about  among  the  other  fifty  tables. 
He  makes  a  swift  and  accurate  mental  in- 
ventory of  every  car  of  grain  arrived,  how 
much  off-grade  stuff,  how  much  premium 
grade,  and  so  on.  Every  seller  of  grain  he 
knows  intimately.  They  are  his  competi- 
tors. There  are  about  100  of  them.  The 
buyers  of  grain  he  knows  equally  well,  and 
what  their  particular  requirements  are. 
And  so  when  the  gong  sounds  for  trading 
to  begin,  he  has  his  selling  campaign  well 
in  mind — what  to  do  with  his  white  corn  or 
his  yellow  corn,  or  his  mixed  corn,  or  his 
white  or  standard  oats,  or  his  hard  wheat 
or  his  soft  wheat.  The  actual  bargaining  is 
keen  to  an  extreme  degree.  It  is  doubtful 
whether  any  better  exhibitions  of  salesman- 
ship are  anywhere  to  be  found  than  here,  or 
any  more  fierce  competition.  In  one  sense  it 
is  an  auction — ^the  sales  going  to  the  high- 
est bidder.  Only  there  are  many  sellers  and 
many  buyers. 


CHICAGO  BOARD  OF  TRADfe  39 

SCALPING. 

Sometimes  the  claim  is  made  by  those 
not  famiHar  with  facts  that  these  grain 
dealers  buy  and  sell  from  one  another,  the 
same  car  of  grain  thus  passing  back  and 
forth  several  times,  ''each  one  taking  a 
commission  on  it."  I  once  looked  up  the 
history  of  twelve  hundred  cars  of  cash 
grain  sold  on  the  Chicago  Board  of  Trade, 
to  see  how  many  cars  pass  directly  from  the 
original  shipper,  through  the  one  commis- 
sion merchant,  to  the  consumptive  buyer. 
All  these  cars  but  two  followed  this  short 
route.  In  other  words,  ''scalping"  of  cash 
grain  in  this  market  is  a  very  small  fraction 
of  I  per  cent. 

PERSONNEL. 

When  it  is  remembered  that  here  are  as- 
sembled as  buyers,  representatives  of  the 
large  milling  interests  (including  the  Min- 
neapolis mills),  of  all  the  large  exporters, 
buyers  for  the  various  grain  industries,  in- 
cluding the  Quaker  Oats  Company,  the 
Corn  Products  Company,  and  similar  indus- 
tries, the  owners  of  big  seed  houses,  and 
other  grain  interests,  when  all  these  are  re- 
membered, to  repeat,  it  is  apparent  that  the 
cash  grain  market  is  strongly  represented 
on  the  buying  side  and  that  these  buyers 
are  competitors. 

SPECULATION. 

The  most  familiar  form  of  speculation 
in  America  today  is  land  speculation — that 
is,  the  buying  of  a  piece  of  land  or  a  town 
lot,  expecting  to  sell  it  later  at  a  profit.  The 
expected  profit  is  to  come  from  a  change  in 
price.     The  real  essence  of  speculation  is 


40  CHICAGO   130ARD  OF  TRADE 

profit  due  to  price  fluctuations.  Compare, 
for  instance,  a  farmer,  a  retailer,  and  a 
professional  speculator  on  the  organized 
exchanges.  Whence  come  the  profits  of 
each?  The  farmer  aims  to  make  his  profit 
by  using  his  land,  labor  and  capital  in  pro- 
ducing crops  for  market.  When  once  pro- 
duced, he  may  hold  his  crop  for  a  rise  in 
price,  thus  adding  a  little  speculative  profit 
(or  loss)  to  his  farming.  In  brief,  his 
profits  come  primarily  from  good  farming, 
and  only  incidentally  from  speculation.  The 
retail  merchant  likewise  is  not  a  specula- 
tor, for  his  profits  come  from  buying  at 
wholesale  and  selling  at  retail.  He  may 
forecast  a  rise  in  price  of  sugar  (for  exam- 
ple) and  lay  in  a  big  stock,  thus  making  a 
speculative  profit  (ar  loss)  through  price 
fluctuation.  But  his '  speculative  profits  are 
purely  incidental.  And  now  comes  the 
speculator,  whose  profits  come,  primarily, 
from  price  fluctuations — buying  cheap  and 
selling  dear;  or  what  amounts  to  the  same 
thing  in  the  end,  selling  dear  (for  future 
delivery)  and  buying  cheap  (to  fulfill  his 
contract). 

Speculation,  then,  may  be  defined  as  fore- 
casting a  change  in  value,  and  buying  or 
selling  to  make  a  profit  from  such  change. 

SPECULATION    IN    CASH    AND   FUTURE 
TRADING. 

Recently  I  was  talking  to  a  noted  preach- 
er, famed  for  his  stern  opposition  to  "spec- 
ulation." He  had  just  bought  a  $5,000 
farm,  paying  down  on  it  $500.  Was  he 
going  to  go  "back  to  the  land,"  I  asked.  He 
was  not.  He  planned  to  sell  to  a  prospec- 
tive  customer    for   $6,000,   thus   taking   a 


CHICAGO  BOARD  OF  TRADE       4t 

profit  of  $i,ooo.  In  trade  language,  by 
putting  up  a  margin  of  $500,  he  speculated 
and  made  a  profit  of  $1,000.  This  illus- 
trates one  outstanding  truth,  namely,  that 
speculation  is  speculation,  whether  in  fu- 
tures or  cash  commodities.  A  Kansas 
farmer  by  the  name  of  Norman  a  few  years 
ago  considered  cash  corn  too  low  at  18  cents 
a  bushel  delivered  at  the  station.  So  he 
bought  and  stored  25,000  bushels.  His  fore- 
cast was  correct.  He  sold  the  corn  at  68 
cents.  He  could  just  as  easily  (and  more 
cheaply),  have  put  up  a  margin,  sent  his 
buying  order  to  a  member  of  the  Chicago 
Board  of  Trade,  and  bought  the  25,000 
bushels  for  future  delivery.  The  essence  of 
both  trades  is  the  same — profit  through 
price  change. 

THREE  KINDS  aF  SPECULATORS. 

On  the  Board  of  Trade  there  are  three 
distinct  kinds  of  speculators,  known  in 
trade  language  as  amateur  speculators,  pro- 
fessional speculators,  and  pit  scalpers.  The 
pit  scalper  is  an  important  factor.  There 
are  about  forty  of  these  pit  scalpers.  A 
scalper  is  a  trader  who  buys  and  sells  on 
very  small  fluctuations  in  the  price,  usually 
with  each  one-eighth  of  a  cent  change,  for 
in  the  pit  price  changes  are  on  the  one- 
eighth  of  a  cent  basis.  The  pit  scalper  is 
thus  said  to  be  in  and  out  of  the  market, 
through  the  day,  but  is  even  at  night.  That 
is,  he  has  sold  as  much  as  he  has  bought. 
He  does  not  go  long  or  short  over  night. 
His  importance  is  in  keeping  a  continuous 
market  when  the  other  class  of  traders  are 
having  a  dull  spell. 

The  professional  speculators  are  men  of 


4^  CHICAGO   BOARD  OF  TRADE 

more  means,  and  who  buy  and  sell  for 
longer  swings  in  the  market.  There  are 
probably  not  a  dozen  men  on  the  Board  of 
Trade  who  make  their  sole  income  as  pro- 
fessional speculators,  although  there  are 
perhaps  a  hundred  men  there  who  can  qual- 
ify as  professional  speculators.  They  are 
members  chiefly  of  large  Chicago  firms,  or 
firms  in  other  cities.  Some  of  them  may 
trade  a  little  every  day.  Some  may  take  a 
trade  only  occasionally.  Most  of  them  have 
other  interests  so  that  they  can  safely  spec- 
ulate and  lose  without  being  wiped  out. 
The  professionals  and  scalpers  together  do 
about  four-fifths  of  the  total  speculation. 

Almost  without  exception,  every  grain 
commission  house  in  Chicago  does  two 
kinds  of  business  for  its  customers:  cash 
grain  (at  i  per  cent  commission)  and  future 
trading  (at  one-fourth  of  a  cent  a  bushel). 
And  future  trading  is,  of  course,  either 
hedging  or  speculation.  The  amateur  spec- 
ulators comprise  those  lawyers,  doctors, 
farmers,  merchants,  and  other  classes,  scat- 
tered all  over  the  United  States  who  send 
in  their  orders  for  speculative  trades  to  the 
commission  houses.  One  big  commission 
house  will  have  about  3,000  of  such  cus- 
tomers. They  all  have  their  respective  mar- 
ket opinions.  And  they  are  willing  to  in- 
vest their  money  on  the  strength  of  this 
opinion.  Hence  their  order  goes  in;  the 
trade  is  executed  on  the  floor — and  then 
stands  as  an  open  contract. 

FUTURES   FURTHER  EXPLAINED. 

Strictly  speaking,  future  trading  is  not 
dealing  in  grain,  but  in  contracts  to  deliver 
grain.    Hence  the  volume  of  futures  natu- 


CHICAGO  BOARD  OF  TRADE       43 

rally  and  properly  greatly  exceeds  the  vol- 
ume of  cash  grain.  Grain  contracts  (fu- 
ture trades)  are  used  very  much  the  same 
as  credits  in  our  present  commercial  struc- 
ture, and  are  a  sign  of  health  and  growth, 
not  of  corruption  and  decay.  Credit  is  de- 
fined as  a  promise  to  pay  money.  But  how 
greatly  the  volume  of  credit  exceeds  the 
volume  of  money!  One  form  of  credit 
alone — and  a  perfectly  sound  one — is  our 
Liberty  Bond  issue,  amounting  to  some 
twenty-five  billions  of  dollars.  This  is  a 
promise  to  pay  in  gold,  and  is,  in  fact,  over 
eight  times  as  large  in  volume  as  all  the  gold 
in  the  country.  Or,  the  commercial  banks 
give  their  customers  the  most  liquid  form 
of  credit  in  business,  namely,  bank  deposits 
subject  to  check,  to  the  amount  of  over  six 
times  the  total  volume  of  money  in  the 
country.  Grain  contracts  are  liquid  con- 
tracts in  the  grain  trade  and  function  as 
liquid  credit  does  in  the  smoothly  function- 
ing business  world.  Whether  grain  futures 
are  ten  times  or  twenty  times  ^  the  volume 
of  the  grain  delivered  is  not  so  important  as 
the  question  whether  or  not  these^  contracts 
are  kept  absolutely  above  question  as  to 
their  integrity  and  safety.  And  the  protec- 
tion thrown  around  these  contracts  by 
Board  of  Trade  rules  has  made  the  various 
cash  grain  interests  use  these  contracts  as 
unhesitatingly  as  they  would  use  gold  coin. 

Credit  is  a  promise  to  pay  money. 

A  grain  contract  (future  trade)  is  a 
promise  to  pay  grain.  Most  credit  trans- 
actions (at  least  95  ,per  cent  of  them)  are 
settled  without  the  use  of  money.  This  is 
sound  banking.     Most  grain  contracts  are 


44 


CHICAGO   BOARD  OF  TRADE 


CHICAGO  BOARD  01?  TRADE      45 

settled  without  the  use  of  grain.  This  is 
sound  and  healthy  business.  It  makes  the 
business  easier  to  transact,  hence  cheaper  to 
transact. 

WIDE  OR  NARROW  MARKET. 

A  wide  market  is  a  market  consisting  of 
many  buyers  and  sellers.  It  is  subject  to 
many  and  small  fluctuations.  A  narrow 
market  is  a  market  consisting  of  few  buy- 
ers and  sellers.  It  is  subject  to  few  but 
violent  fluctuations.    To  illustrate : 

(i)  Wool  market.  The  wool  market  in 
the  United  States  is  a  very  narrow  market, 
there  being  no  organized  wool  exchange  for 
future  trading  and  a  comparatively  small 
number  of  big  manufacturers  and  big  spec- 
ulators as  buyers.  The  number  of  specu- 
lators and  dealers  who  stand  between  pro- 
ducers and  manufacturers  is,  it  will  be 
noted,  small,  not  large,  as  in  the  wheat  mar- 
ket. And  the  large  speculators  themselves 
own  the  bulk  of  the  storage.  Hence,  when 
a  few  big  manufacturers  withdraw  from  the 
market  as  buyers,  as  occurred  in  the  sum- 
mer of  1920,  the  price  sags  enormously. 
There  are  not  enough  speculators  to  come 
in  and  take  up  the  slack.  Hence  wool  prices 
(when  sales  could  be  made  at  any  price  at 
all)  went  as  follows:  Fine  medium  Mon- 
tana clothing  wools  (clean  basis,  Boston 
market)  fell  from  $1.82  per  pound  in  Jan- 
uary to  75  cents  in  November.  On  poorer 
grades  of  wool  the  drop  was  to  15  cents 
at  country  points.  Had  there  been  an  or- 
ganized wool  exchange,  with  futures  and  or- 
ganized speculation  (including  many  small 
speculators  without  storage),  the  market 
would  have  been  a  wide  one,  free  from  stop- 


46      CHICAGO  BOARD  OF  TRADE 

pages  and  violent  fluctuations.  Any  fall  in 
price  would  have  been  cushioned  by  the 
speculative  traders. 

(2)  Beans.  A  perfect  example  of  a  nar- 
row market,  run  for  the  "consumptive  buy- 
er" and  without  the  ''speculator,"  is  fur- 
nished by  the  California  bean  crop  in  1918. 
The  State  Market  Director  of  California, 
in  his  annual  report  for  the  year,  tells  the 
story  in  his  own  words  as  follows : 

"The  conditions  facing  the  growers  were 
in  the  nature  of  an  unprecedented  combina- 
tion of  unfavorable  circumstances. 

"The  small  limit  which  the  Federal  Food 
Administration  had  placed  on  the  profits 
to  be  allowed  to  the  speculative  buyer,  had 
completely  destroyed  his  speculative  inter- 
est in  the  product.  As  a  consequence,  he 
was  unwilling  to  buy  except  from  hand  to 
mouth.  This  left  the  producer  with  no 
buyers  except  for  the  merest  handful  of  the 
product.  Furthermore,  the  banks,  with  ab- 
normal demands  made  on  them  by  the  gov- 
ernment, with  large  advances  made  by  them 
to  barley  and  to  other  growers,  with  a 
weak  and  declining  .  bean  market  staring 
them  in  the  face,  were  in  no  frame  of  mind 
to  look  with  favor  upon  requests  for  finan- 
cial accommodations  coming  from  bean 
growers." 

This  is  a  clear  indication  of  the  produc- 
er's interest  in  a  wide  market,  consisting  of 
both  speculators  and  consumptive  buyers. 

(3)  A  third  example  of  the  meaning  of 
a  narrow  market  may  be  taken  from  the 
wheat  pit  itself,  immediately  following  the 
period  of  government  control.  When  the 
Chicago  wheat  pit  reopened  in  1920  but  few 


CHICAGO  BOARD  OF  TRADE  4/^ 

traders  took  part  in  the  transactions  there. 
It  was  indeed  a  dull  market,  with  few  trad- 
ers and  few  transactions.  This  meant  what 
all  narrow  markets  mean — wide  swings  in 
price,  violent  fluctuations.  To  make  the 
matter  more  specific,  take  the  reopening  of 
the  Winnipeg  wheat  pit  on  July  21,  19  rg. 

The  news  dispatch  states : 

"Winnipeg. — After  suspension  for  two 
years,  wheat  trading  was  resumed  on  the 
Grain  Exchange  here  July  21.  The  first 
bid  was  $2.10  for  October,  with  no  offers 
(i.e.,  no  sellers),  and  the  first  sale  was  made 
at  $2.20,  the  price  rising  to  $2.25  asked  with 
no  buyers.  But  5,000  bushels  were  dealt 
in  the  first  hour.  The  first  bid  for  Decem- 
ber wheat  was  $2.23,  with  no  sales.  Dealers 
are  inclined  to  be  cautious.  The  millers 
are  not  in  the  market,  but  are  watching  the 
situation  closely.'' 

Here  is  a  market  without  speculators — 
and  what  a  narrow  market  it  is,  how  un- 
suited  for  hedging  cash  grain  in.  It  is  the 
universal  and  unanimous  opinion  among  all 
handlers  of  cash  grain  with  whom  I  have 
conferred  on  the  subject,  that  the  specula- 
tor is  needed  to  make  a  wide  market.  The 
wide  market  is  needed  to  keep  down  the 
costs  of  handling  cash  grain.  And  lowering 
the  handling  costs  is  desired  by  the  public. 

WHY  DO  PRICES  FLUCTUATE? 

We  see  all  around  us  price  changes.  The 
city  consumer,  during  the  World  War, 
blamed  the  "profiteer"  and  speculator  for 
the  tremendous  rise  in  the  price  of  farm 
products.  Since  the  war,  with  a  general  re- 
cession  in    food   prices   and   other  •prices, 


4^  CHICAGO  BOARD  OF  TRADfi 

those  suffering  from  the  fall  in  prices  quite 
generally  blame  the  market  machinery  for 
this  decline.  And  since  the  organized  ex- 
changes are  such  concrete  and  highly  cen- 
tralized pieces  of  market  machinery,  criti- 
cism has  quite  naturally  focussed  on  them. 
Why  prices  fluctuate,  and  the  true  relation 
of  organized  speculation  can  best  be  an- 
swered in  the  form  of  brief  questions  and 
categorical  answers. 

Q.  Have  we  any  article,  bought  and  sold 
on  the  market,  and  not  subject  to  specula- 
tive trading? 

A.  Yes.  United  States  Government 
bonds.  The  interest  rate  and  the  face  value 
of  the  bond  are  both  stamped  on  the  bond  in 
plain  figures,  and  both  will  be  paid  in  full 
in  gold. 

Q.  Are  these  bond  prices  then  entirely 
free  from  fluctuation? 

A.  No ;  on  the  contrary,  they  show  wide 
fluctuations  in  price.  Just  before  the  World 
War,  the  4  per  cent  bonds  were  selling  at 
116.  In  April,  1920,  4%  per  cent  bonds 
were  selling  at  84.  This  is  a  difference  of 
$32  on  a  $100  bond. 

Q.  Were  these  price  fluctuations  due  to 
speculation  ? 

A.  No.  The  chief  buyers  were  savings 
banks  and  insurance  companies. 

Q.  Did  the  bond  prices  fluctuate  greatly 
during  the  year  1920? 

A     Yes. 

Q.  Did  the  supply  of  bonds  increase 
during  this  year  ? 

A.  No.  There  were  no ,  new  issues. 
The  supply  of  bonds  was  therefore  con- 
stant. " 


CHICAGO  BOARD  OF  TRADE       49 

Q.  What  did  make  the  prices  fluctuate 
then? 

A.  The  demand.  Buyers  preferred 
other  securities^  and  would  buy  these  bonds 
only  at  price  reductions. 

This  short  catechism  is  given  to  teach  one 
truth,  namely,  that  severe  price  fluctuations 
occur  in  one  non-speculative  article,  due 
wholly  to  supply  and  demand  influences. 
And  just  as  Government  bonds  fluctuate  in 
price,  according  to  the  fundamental  eco- 
nomic law  of  supply  and  demand,  so  also  do 
wheat  and  other  commodities. 

"stabilized''  wheat  price. 

Fortunately,  we  can  test  this  rule  of 
wheat  price  fluctuations  by  taking  the  34 
months  of  Government  control  of  wheat 
price  with  future  trading  abolished,  and 
comparing  them  with  the  34  months  of  nor- 
mal times  prior  to  the  war  with  future 
trading  in  force.  The  government  stabilized 
price  for  No.  2  Northern  wheat  did  not 
succeed  in  holding  this  wheat  down,  but  on 
the  contrary,  the  demand  put  the  price  up 
to  $2.32  in  July,  1918,  and  to  $3.50  in  De- 
cember, 1919,  Taking  the  whole  range  of 
price  for  the  68  months,  (i)  October,  191 1- 
August,  1914,  and  (2)  September,  1917 
(when  the  stabiHzed  price  began)  to  June, 
1920,  inclusive  (when  the  Government  con- 
trol ended),  and  considering  No.  2  North- 
ern cash  wheat,  the  actual  figures  on  the 
Chicago  Board  of  Trade  show  the  follow- 
ing: 

In  the  first  period  (with  only  future  trad- 
ing to  stabilize  prices),  price  ranges  were 
as  follows:  October,  191 1,  from  108  to 
117,  or  9  cents;  November,  5-cent  range; 


50       CHICAGO  BOARD  OF  TRADE 


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Price 
Control 
of    No. 


Stabilization:      (1)     Under    Government 
(2)  Under  Future  Trading.   Cash  Price 
2   Northern   Wheat,    Chicago   Board   of 
Trade,  for  68  months.    From  August  25,  1917,  to 
July  1,  1920,  price  was  controlled  by  the  govern- 
ment and  no  Future  Trading  was  allowed. 
Note  the  greater  stability  under  Future  Trading. 


CHICAGO  BOARD  OF  TRADE       5I 

December,  5-cent  range.  Thus  the  total 
range  for  these  three  months  was  9  plus  5 
plus  5  cents,  or  19  cents.  The  total  range 
for  the  whole  34  months  prior  to  the  war 
was  211^  cents,  or  an  average  of  6.2  cents 
a  month. 

Now,  applying  the  same  test  to  the  34 
months  period  when  the  price  was  stabilized 
by  the  Government,  we  find  the  following : 
September,  1917,  from  2.20  to  2.30,  or  10 
cents.  Thus  in  the  same  manner,  the  total 
range  for  the  34  months  of  Government 
control  was  786  cents,  or  an  average  of  23.1 
per  month. 

To  summarize,  when  stabilized  by  future 
trading  the  monthly  range  was  6.2  cents. 

When  stabilized  by  the  Government  (all 
speculation  in  wheat  futures  abolished)  the 
monthly  range  was  23.1  cents.  (See  Chart 

4.) 

SPECULATION  LESSENS  FLUCTUATIONS. 

The  evidence  in  the  foregoing  graph  illus- 
trates the  economic  truth  that  organized 
speculation — on  a  wide  market — lessens 
fluctuations.  This  is  further  illustrated  by 
studying  what  actually  happens  on  the  Chi- 
cago Board  of  Trade  (not  what  some  care- 
less public  speaker  falsely  says  happens 
there) .  Until ,  recently  the  three  grains — 
wheat,  oats,  barley — were  sold  as  cash 
grains  on  the  same  tables  and  in  the  same 
manner,  but  there  was  no  barley  pit.  In 
the  period  before  future  trading  in  barley 
was  begun,  wheat  and  oats  were  subject  to 
future  trading  or  to  wide  speculation  in 
their  respective  pits,  while  barley  was  not. 
Which  prices,  therefore,  show  the  wider 
fluctuations?    Taking  15  normal  years  as  a 


^±  CHICACO  BOARD  OF  TRADE 

fair  test,  free  from  wars  or  panics,  1900- 
191 4,  we  find  the  following  fluctuations  in 
cash  prices : 

Not  once  in  this  period  did  wheat  show 
a  fluctuation  of  100  per  cent  in  any  one 
year. 

Only  twice  in  this  period  (1901,  1902)  did 
oats  show  a  fluctuation  of  over  100  per  cent. 

Seven  times  in  this  period  barley  did 
show  a  fluctuation  of  over  100  per  cent. 

It  is  facts  such  as  the  above  that  cause  an 
increasing  number  of  informed  farmers  to 
use  the  Board  of  Trade  to  stabilize  the 
price  of  their  wheat. 

"Why  are  wheat  prices  always  forced 
down  in  the  fall?"  This  is  one  of  the  three 
questions  asked  by  the  president  of  a  farm 
bureau.  The  implication  is,  of  course,  that 
somebody  defies  the  law  of  supply  and  de- 
mand and  "forces''  prices  down.  The  an- 
swer is,  in  the  first  place,  that  prices  are 
not  forced  either  up  or  down  by  the  Board 
of  Trade;  and  in  the  second  place,  prices 
are  not  always  "down"  in  the  fall.  If  that 
were  true,  the  market  would  be  a  "sure 
thing"  for  the  short  seller  who  wanted  to 
speculate  in  July  by  selling  for  September  or 
December  delivery.  Examine  the  Chicago 
market  for  fifty  years  and  see  what  actually 
happens — not  what  our  silver-tongued  ora- 
tors tell  us ;  the  facts,  not  the  fancies. 

In  the  fifty  years,  1866-1915,  the  annual 
lowest  point  of  cash  wheat  prices  <  was 
reached  four  times  in  September,  five  times 
in  December.  The  annual  highest  point  of 
cash  wheat  prices  was  reached  five  times  in 
September  and  six  times  in  December.  This 


CHICAGO  BOARD  OF  TRADE       53 

is  conclusive  proof  that  the  price  of  wheat 
is  not  "always  forced  down  in  the  fall." 

"Why  is  a  bushel  of  wheat  not  worth  as 
much  one  day  as  another?"  This  is  the 
second  question  asked  by  the  president  of  a 
farm  bureau.  The  answer  is,  for  the  same 
reason  that  a  government  bond  is  not  worth 
as  much  one  day  as  another,  because  the 
supply  or  the  demand  or  both  fluctuates 
from  day  to  day,  from  hour  to  hour. 

CORNERS. 

Does  the  Board  of  Trade  increase  or  de- 
crease the  number  of  corners?  Yes  and 
no.  As  originally  organized  and  conducted, 
with  its  wide  open  policy,  the  board  afforded 
machinery  for  promoting  corners.  Only  one 
grade  of  wheat  was  deliverable  on  contract 
and  this  made  cornering  the  supply  easy 
for  a  rich  man.  And  so  early  in  the  Board's 
history  a  sort  of  code  of  honor  grew  up, 
winking  at  corners,  and  even  permitting  the 
bucketing  of  trades,  the  crossing  of  trades, 
the  matching  of  trades  and  nipping  trades. 
Not  till  1865  did  the  Board  take  any  steps 
whatever  to.  regulate  future  trading,  and 
not  till  nearly  twenty  years  later  did  cor- 
nering the  market  threaten  to  destroy  the 
Board.  By  that  time  the  volume  of  cash 
grain  had  grown  so  large  that  the  cash 
grain  interests  turned  in  self  protection 
against  the  prostitution  of  the  market  ma- 
chinery by  the  manipulators.  From  that 
time  on  rules  have  been  added,  from  year  to 
year,  curtailing  the  power  of  the  manipu- 
lator and  outlawing  the  whole  practice  of 
corners.  For  instance,  the  Board  has  made 
and  will  enforce  the  following  rules:  (i) 
Shipping  grain  out  of  store  and  selling  it 


54       CHICAGO  BOARD  OF  TRADE 

at  less  than  Chicago  prices  to  produce  a 
shortage  in  Chicago,  is  now  deemed  "un- 
commercial and  dishonorable  conduct." 
Penalty,  expulsion.  (2)  The  short  seller,  in 
case  of  a  market  squeeze,  may  under  certain 
conditions  settle  at  a  "fair  price,''  not  at  the 
"fictitious  price."  (3)  Instead  of  one  grade 
of  wheat,  21  grades  are  now  deliverable  on 
future  contracts.  (4)  Delivery  on  track 
may  be  made  within  the  Chicago  switching 
district  during  the  last  3  days  of  the  month 
in  case  the  stored  grain  is  held  for  too  high 
a  price.  (5)  To  meet  the  situation  arising 
from  the  ownership  of  terminal  storage  by 
a  few  large  interests  (and  the  possible  abuse 
of  this  concentration),  a  rule  provides  that 
the  Directors  of  the  Board  may  in  an  emer- 
gency declare  any  storehouse  in  Chicago, 
with  proper  trackage,  or  any  vessel  in  the 
harbor,  to  be  regular  places  for  the  storage 
of  grain  deliverable  under  Board  of  Trade 
rules.  This  adds  to  the  11,000,000  bushels 
of  "regular"  storage  some  40,000,000 
bushels  more. 

Added  to  the  above  rules  of  the  Board  is 
the  decision  of  the  United  States  Supreme 
Court  declaring  it  a  crime  to  corner  the 
market.  Hence  the  Directors  of  the  Board 
of  Trade  very  clearly  have  within  their 
hands  power  to  deal  with  the  evil  of  cor- 
ners. Hence  there  has  been  no  artificial 
corner  of  the  wheat  market  since  the  days 
of  "Old  Hutch"  in  1888.  The  so-called 
Leiter  corner  in  1898  was  a  failure  and  cost 
Leiter  himself  many  millions.  Leiter  did 
not  corner  the  market.  The  so-called  Pat- 
ten "corner"  of  May  wheat  in  1909  was  in 
no  sense  a  corner.     It  was  a  natural  condi- 


CHICAGO  BOARD  OF  TRADE       55 

tion.  The  top  price  of  cash  wheat  in  May 
was  $1.54.  But  with  Mr.  Patten  out  of  the 
market  during  June,  the  actual  market 
shortage  caused  June  prices  to  go  higher, 
ranging  as  high  as  $1.60.  High  prices  held 
till  the  new  crop  came  in  in  July. 

So  it  is  to  be  concluded  that  in  the  early 
days  the  Chicago  Board  of  Trade  did  make 
easier  the  running  of  corners,  but  in  the  past 
ten  or  twenty  years  it  has  tended  to  prevent 
corners  and  has  prevented  corners.  The 
Board  of  Directors  not  only  have  the  power 
to  prevent  corners,  but  it  is  also  to  their  in- 
terests to  do  so. 

MANIPULATION. 

Manipulation  is  usually  defined  as  forc- 
ing prices  up  or  down  by  artificial  means, 
by  deception  or  fraud.  Influencing  the 
grain  market  by  spreading  false  crop  re- 
ports (common  practice  fifty  years  ago), 
or  by  spreading  false  rumors  of  crop  dam- 
age are  examples  of  manipulation  both  of 
which  are  positively  forbidden  and  pun- 
ished by  Board  of  Trade  rules.  Like  "cor- 
nering the  market,''  these  forms  of  "manip- 
ulating the  market''  are  not  present  prac- 
tices on  the  Board  of  Trade. 

Once  a  prominent  market  manipulator 
said  about  the  Chicago  Board  of  Trade: 
"It  is  easy  to  corner  the  market,  but  it  is 
hard  to  bury  the  corpse."  That  philosophy 
about  "burying  the  corpse"  still  applies  to 
"market  raids"  by  bulls  or  bears. 
"raids." 

It  frequently  happens  that  prices  begin 
to  trend  upward  for  a  few  days  or  down- 
ward for  a  few  days,  and  the  usual  news- 
paper reports  state  that  a  "bull  raid'Jf  or 


56       CHICAGO  BOARD  OF  TRADC: 

*'bear  raid"  is  in  progress.  The  implication 
is  that  some  powerful  trader  or  some  com- 
bination of  traders  with  millions  of  dollars 
are  raiding  the  market.  This  is  simply 
careless  phraseology.  It  means  that  condi- 
tions are  so  obviously  bullish  or  bearish 
that  the  majority  are  naturally  buying  or 
selling  at  the  same  time. 

SHORT    SELLING. 

But  does  short  selling  depress  prices? 
No.  For  the  amount  bought  equals  the 
amount  sold.  For  just  as  truly  as  some 
big  bear  ''throws  a  million  bushels"  on  the 
market,  some  bull  buys  this  same  million 
bushels.  Or,  what  is  more  significant,  the 
big  speculator  who  today  is  a  bear  and  sells 
one  million  bushels  (thinking  the  price  is 
too  high)  will  later  buy  back  this  million 
to  close  his  contract.  Surely  his  buying  a 
million  will  Hft  the  price  as  much  as  his 
selling  a  million  has  depressed  the  price. 

PUTTING   ON    BRAKE. 

The  fact  is  that  the  effect  of  speculation  on 
price  (including  short  selling)  is  merely  to 
put  on  the  brake  against  every  bulge  or 
break  in  price.  Obviously,  if  the  price 
bulges  a  few  cents,  the  bear  (short  seller) 
foreseeing  a  loss  impending,  begins  to  cover 
(to  buy  back  what  he  sold).  At  the  same 
moment  the  bulge  makes  it  to  the  interest 
of  the  bull  (buyer)  to  sell  out  and  take  his 
profits.  It  is  in  this  manner  that  the  two 
conflicting  interests,  in  protecting  them- 
selves, tend  to  take  the  opposite  sides  of  the 
market  with  any  definite  price  changes,  thus 
tending  to  check  any  very  wide  and  sudden 
fluctuations. 


CHICAGO  BOARD  OF  TRADE  57 

MONOPOLY. 

As  now  conducted  the  gram  trade  is  our 
most  competitive  institution,  as  pointed  out 
in  chapter  two,  and  is  conducted  further- 
more on  the  lowest  margins  of  cost  of  any 
farm  product.  Doubtless  it  would  be  a 
good  thing  to  eliminate  all  gambling  from 
the  grain  trade,  just  as  it  would  be  a  good 
thing  to  put  a  stop  to  all  gambling  at  card 
parties,  church  fairs,  ball  games  and  else- 
where in  society.  But  who  has  a  ready- 
made  program,  legislative  or  otherwise,  that 
will  accomplish  this  result?  Education,  re- 
ligious and  otherwise,  is  slowly  reducing 
the  evil  of  gambling  in  society.  Hence  this 
is  not  a  problem  of  the  grain  exchanges 
particularly.  Is  speculation  gambling? 
Speculation  on  the  organized  exchange  is 
not  gambling  any  more  than  speculation  in 
cash  grain,  in  town  lots,  or  in  farm  land  is 
gambling.  If  it  were  possible  to  eliminate 
the  thousands  of  small  speculators — the 
lawyer  from  Kokomo,  Indiana;  the  doctor 
from  Ames,  Iowa ;  the  farmer  from  Tarkio, 
Missouri;  the  priest  from  Topeka,  Kansas; 
the  preacher  from  Zanesville,  Ohio — if  it 
were  possible,  I  say  to  eliminate  these  thou- 
sands of  ''small  speculators''  from  the  Chi- 
cago Board  of  Trade,  there  would  of  course 
be  left  fewer  speculators  there.  But  they 
would  be  the  strong  ones,  the  giants  of  the 
pit.  The  trade  would  be  dominated  by  a 
few  powerful  houses  and  their  clients.  This 
would  represent  a  dangerous  concentration 
and  control  of  the  grain  trade  in  the  hands 
of  a  few  competing  houses.  A  combine — 
a  monopoly — would  not  be  difficult  to  se- 
cure in  such  a  case.    But  as  now  organized 


58       CHICAGO  BOARD  OF  TRADE 

the  greatest  protection  the  public  has  against 
monopoly  is  the  large  number  of  widely 
scattered  speculators,  trading  through  over 
a  hundred  different  houses  on  the  Board  of 
Trade.  If,  for  instance,  Mr.  A.  with  his 
3,000  customers  was  able  to  form  a  com- 
bine with  Mr.  B  with  his  3,000  customers, 
this  would  still  leave  the  bulk  of  the  specu- 
lative traders  not  only  outside  the  combine 
but  scattered  so  widely  over  the  whole 
United  States  that  no  collusion  would  be 
possible  among  a  majority  of  them.  It  is 
for  this  reason  that  any  big  house  does  not 
and  cannot  control  prices  on  the  Board  of 
Trade.  In  other  words,  organised  specula- 
tion  is  the  public's  protection  against 
monopoly.  Abolish  speculation  in  futures, 
and  speculation  is  then  concentrated  on  cash 
grain  and  must  be,  by  the  same  token,  car- 
ried on  only  by  fewer  and  more  powerful 
persons.  This  sort  ©f  speculation  is  illus- 
trated on  such  big  cash  markets  as  Buenos 
Aires,  Odessa  or  Konigsberg,  where  price 
fluctuations  are  frequent  and  violent,  where 
wide  margins  are  taken,  and  where  the  mar- 
ket is  dominated  by  powerful  cash  grain 
interests. 

INCREASING   USE   OF  FUTURES. 

The  use  of  future  trading  has  spread  into 
many  lines  of  business,  the  purpose  being 
to  introduce  an  added  element  of  business 
stability.  The  "forward  contract,"  as  it  is 
called  in  the  steel  industry,  or  running  on 
orders,  is  the  usual  form  of  running  the 
more  expensive  isteel  plants  in  order  to  keep 
hedged  against  price  fluctuations.  The  fur- 
niture factories  of  Grand  Rapids  and  else- 
where work  on   future  contracts,  actually 


CHICAGO  BOARD  OF  TRADE       59 

^'selling  short"  as  far  as  the  finished  prod- 
uct is  concerned.    Most  of  the  big  bakeries 
have  long  time   future  contracts  in  flour 
with  the  millers,  just  as  the  millers  have 
their  future  contracts  in  grain  with  the  pit 
traders.    Apples  are  sold  by  the  growers  or 
dealers,  in  the  orchard  areas  of  the  North- 
west, for  future  delivery.     Oddly  enough, 
the  heaviest  future  trader  in  apples,  on  the 
buying  side,  is  the  farmer— the  organized 
farmer   of    the   Canadian    West.      In   the 
spring  of  1919,  for  instance,  the  farmers 
belonging   to   the    United    Grain    Growers 
(Winnipeg)  placed  one  order  for  $300,000 
worth  of  apples  for  fall  delivery.    Califor- 
nia walnuts  are  sold  for  future  delivery  by 
the  growers,  the  forward  contract  usually 
being  made  in  January  for  the  fall  deliv- 
eries.    Cahfornia  prunes  and  apricots  are 
handled   by   the   organized    growers    in    a 
somewhat  similar  manner,  the  contracts  be- 
ing made  early  in  the  summer.    In  the  line 
of  pure  food  products,  great  manufacturers 
like   H.   J.   Heinz   of    Pittsburgh   contract 
ahead  with  growers  in  order  to  be  sure  of 
their  sources  of  supply.     The  importation 
of  oriental  beans,  so  important  during  and 
since  the  World  War,  is  conducted  through 
dealers  who  depend  largely  on  future  con- 
tracts.      Butter  and   egg  exchanges  have 
finally  developed  future  trading  much  like 
the   grain   exchanges.     Future   trading   m 
CRRS  began  on  the  Chicago  Mercantile  Ex- 
change in  1919  and  on^  the  New  York  Mer- 
cantile Exchange  in  1920.    It  is  noteworthy 
that  in  those  foreign  countries  where  future 
trading  in  grain  is  conducted  very  much  as 
in  America,  the  use  of  future  contracts  is 


I 


6o      CHICAGO  BOARD  OF  TRADE 

Spreading  to  other  things.  The  latest  of 
these  movements  of  worldwide  importance 
is  the  founding  at  Antwerp,  March  i,  1920, 
of  a  market  for  deahng  in  futures  in  for- 
eign exchange.  The  need  of  insuring  the 
Belgian  purchaser  of  foreign  goods  against 
future  losses  due  to  excessive  fluctuations 
in  foreign  exchange  led  to  this  step.  This  is 
but  a  fresh  illustration  of  the  economic 
functions  of  our  own  organized  exchanges, 
namely,  to  stabilize  prices  and  protect  regu- 
lar dealers  against  losses  due  to  price  fluc- 
tuations. Yet  we  still  have  some  careless 
public  speakers  who  tell  us  that  future 
trading  is  the  cause  of  price  fluctuations ! 

COST  OF  FUTURE  TRADING. 

Future  trading  in  grain  in  the  United 
States  is  centered  in  Chicago,  the  volume  of 
trading  there  being  much  larger  than  all  the 
combined  futures  on  all  the  other  ex- 
changes. The  future  contracts  in  wheat, 
oats  and  corn  in  Chicago  amount  to  twenty 
billion  bushels  a  year — that  is,  four  times 
the  crop.  What  is  the  "toll''  on  this  volume 
of  business?  That  is  easy  to  calculate 
when  once  it  is  known  what  the  commission 
charge  is  and  what  amount  of  trading  is 
done  by  members  for  themselves  on  which, 
of  course,  no  commission  is  collected.  The 
commission  on  future  trading,  for  non- 
members,  is  one-fourth  cent  a  bushel.  This 
means  $12.50  to  buy  S,ooo  bushels  or  to  sell 
5,000  bushels,  or  for  the  round  turn — both 
buying  and  selling.  For  a  member  trading 
through  another  member  the  fee  is  one-half 
the  regular  commission.  Investigations  have 
shown  that  of  all  the  future  trading,  53 
per  cent  is  by  members  for  themselves,  2y 


CHICAGO  BOARD  OF  TRADE      6l 

per  cent  is  by  members  for  other  members, 
and  20  per  cent  is  by  nonmembers.  This 
brings  the  total  commissions  up  to  approxi- 
mately $20,000,000,  or  a  charge  against  the 
crop  of  two-fifths  cent  a  bushel.  Consid- 
ering the  hedging  feature  of  future  trading, 
this  is  remarkably  cheap  insurance.  Were 
future  trading  abolished,  hedging  would 
of  course  be  secured  by  paying  the  pro- 
ducer less,  charging  the  consumer  more,  or 
both.  Judging  by  the  experience  of  large 
cash  markets  that  have  no  future  trading, 
this  form  of  hedging  would  likely  cost  10 
cents  a  bushel.  But  since  this  is  such  a 
vital  point,  some  concrete  evidence  must  be 
submitted. 

The  Saskatchewan  farmers'  co-operative 
elevators,  in  the  spring  of  19 17,  when  fu- 
ture trading  was  temporarily  suspended  on 
the  Winnipeg  Grain  Exchange,  were  con- 
fronted with  the  two  alternatives:  (i)  of 
buying  wheat  on  a  wider  margin  (as  a  hedge 
or  insurance)  ;  (2)  of  stopping  buying 
altogether.  In  their  own  official  report  of 
this  emergency,  when  no  future  trading 
was  available,  they  say: 

"Our  company  deemed  it  advisable  to 
stop  buying  until  matters  were  adjusted. 
We  do  not  speculate  and  consequently  re- 
fuse to  have  anything  to  do  with  any  form 
of  speculation.  To  buy  wheat  at  our  ele- 
vators during  a  time  when  we  had  no 
means  of  making  hedging  sales  would  have 
meant  speculating  with  whatever  we  pur- 
chased, so  we  stopped  buying.  After  a  few 
days  of  inactivity  an  arrangement  was  ar- 
rived at  between  the  Royal  Wheat  Commis- 
sion ?  .  .  whereby  the  May  and  July  deliv- 


62  CHICAGO  BOARD  OF  TRADE 

ery  contracts  would  be  liquidated  and  busi- 
ness for  the  balance  of  the  season  taken 
care  of.  .  .  .  Buying  was  at  once  resumed 
in  the  country/'  (Quoted  from  the  Sas- 
katchewan Co-operative  Elevator  News, 
June,^  1917.)  .       ^ 

This  quotation  furnishes  proof  of  the 
fact  that  where  the  organized  farmers 
themselves  use  the  future  market  on  the 
grain  exchange  they  find  that  it  cheapens 
the  cost  of  handling  the  grain  instead  of 
adding  a  "toll." 

TOLLS  AND   PROFITS   IN   GRAIN   TRADE. 

The  third  question  asked  by  the  president 
of  a  farm  bureau  (mentioned  before)  was, 
"Why  is  there  three  times  as  much  profit 
made  on  a  bushel  of  wheat  after  it  leaves 
the  farmer's  hands  as  the  farmer  made?" 

This  question  implies  that  the  farmer 
who  grows  wheat,  year  after  year,  has  very 
little  profits  to  show  for  it.  The  best  an- 
swer to  this  question  is  to  take  our  greatest 
wheat  State,  Kansas,  and  see  what  has  hap- 
pened to  land  values  where  the  farmers 
have  stuck  to  wheat  growing.  Sumner 
County  is  the  world's  famous  wheat  county. 
In  the  year  1880  the  farmers  there  put  in 
59,000  acres  of  wheat;  this  land  then  had 
a  value  of  $9.42  an  acre.  When  the  1910 
census  was  taken,  30  years  later,  these 
farmers  had  in  170,000  acres  of  wheat  and 
their  land  had  risen  in  value  to  $44.88  an 
acre.  The  fact  that  the  wheat  acreage  in- 
creased and  the  land  values. rose  some  300 
per  cent  during  this  period  indicates  that 
the  farmers  had  very  liberal  profits  on  their 
wheat. 

Or,  to  take  a  specific  case.     The  well- 


CHICAGO  BOARD  OF  TRADE      63 

known  William  Goepfert  farm  is  in  the 
Kaw  Valley,  one  mile  east  of  the  village  of 
Perry,  Jefferson  County,  Kansas.  Forty- 
seven  years  ago  Mr.  Goepfert  got  this  val- 
ley land,  the  value  then  being  $37  an  acre. 
For  forty-one  years  out  of  the  past  forty- 
seven  he  has  had  the  land  continuously  in 
wheat;  the  value  of  the  land  now  is  $300 
an  acre.  Evidently  the  wheat  farmer  must 
be  making  some  money. 

SUMMARY  ON  SPECULATION. 

Speculation,  in  its  widest  meaning,  in- 
cludes the  assumption  of  economic  risks 
for  the  sake  of  profit,  and  is  therefore  a 
social  question  rather  than  a  question  of 
the  grain  trade.  In  this  wide  sense  of  the 
term,  all  those  persons  who  build  new  rail- 
roads, open  up  new  mines  of  copper,  lead, 
iron,  silver  or  gold,  build  great  steamships, 
construct  factories  or  enter  new  fields  of  in- 
dustry and  commerce  are  speculators,  in 
the  best  sense  of  that  much  abused  word. 
Thus  the  revered  Pilgrim  Fathers  came 
here  300  years  ago,  being  sent  over  by  a 
business  corporation,  the  original  charter 
of  which  was  granted  by  the  king  to  a  com- 
pany of  speculators,  or  "adventurers,''  as 
they  were  termed  in  the  charter.  As  the 
word  is  used  today,  it  has  lost  much  of  its 
meaning  of  "adventurer"  and  risk  taker 
and  has  come  to  be  loosely  used  in  a  gen- 
eral condemnatory  manner.  Briefly,  what 
is  the  evil  and  what  is  the  good  in  that  form 
of  speculation  which  is  used  on  the  organ- 
ized exchanges?  For  unorganized  specu- 
lation is  not  being  considered  in  this 
booklet. 


64       CHICAGO  BOARD  OF  TRADE 
EVILS  OF  SPECULATION. 

There  is  good  speculation  and  bad  specu- 
lation. The  evils  of  speculation  are  the 
evils  associated  with  bad  speculation.  Bad 
speculation  is  speculation  by  the  unfit.  The 
unfit  are  of  three  classes : 

(i)  The  ignorant — those  who  do  not 
know  enough  about  market  conditions  to 
have  an  intelligent  opinion. 
.  (2)  Those  who  cannot  aflford  to  lose. 
Board  of  Trade  rules  tend  to  make  it  more 
and  more  difficult  for  this  class  to  specu- 
late on  the  futures  markets. 

(3)  The  third  group  comprises  all  those 
persons  in  a  position  of  trust.  Fortunately, 
many  members  now  utterly  refuse  to  han- 
dle any  such  business.  The  evils  of  these 
forms  of  speculation — and  these  are  all 
abuses  rather  than  proper  uses  of  specula- 
tion— fall  hardest  on  the  membership  them- 
selves of  the  organized  exchanges.  Theirs 
are  the  losses  through  bad  debts,  theirs  the 
odium. 

BENEFITS  OF  SPECULATION. 

What  is  said  here  about  the  ''benefits"  of 
speculation  does  not  include  land  speculation 
or  any  of  the  many  forms  of  unorganized 
speculation.  Reference  is  made  solely  to 
speculation  on  the  organized  exchanges, 
that  is,  speculation,  harnessed,  directed  and 
put  to  work  in  moving  the  grain  crops  from 
producer  to  consumer  at  a  low  margin  of 
cost.  Bearing  in  mind  then  that  this  kind 
of  speculation  is  one  economic  form  of 
assumption  of  risk  (insurance),  and  that 
furthermore  this  kind  of  speculation  merely 
registers  future  prices  but  does  not  fix  fu- 
ture prices   (as  the  weather  vane  registers 


CHICAGO  BOARD  OF  TRADE       65 

wind  currents  but  does  not  cause  wind  cur- 
rents). Bearing  this  thing  in  mind,  we 
may  enumerate  four  distinct  benefits  of  or- 
ganized speculation: 

(i)  Wide,  Continuous  Market. — Ob- 
servation and  experience  teach  that  the 
speculator  is  often  the  only  buyer  between 
producer  and  manufacturer.  The  numer- 
ous small  speculators  make  the  grain  mar- 
ket (when  left  free  to  act)  a  wide,  continu- 
ous market,  where  any  business  day  of  any 
year  producers  may  sell  their  crop  at  a 
price  which  is  made  openly  and  publicly  by 
the  meeting  of  many  buyers  and  many  sell- 
ers. The  preceding  pages  show  how  this 
sort  of  a  market  was  lacking  to  bean  grow- 
ers and  wool  growers,  to  cite  but  two  of 
many  possible  examples.  While  the  great 
World  War  closed  all  the  world's  stock  ex- 
changes for  a  period  of  many  months,  the 
Chicago  Board  of  Trade  did  not  close  for 
a  single  hour.  From  the  day  it  started — 
before  the  Civil  War,  up  to  the  present  mo- 
ment, this  great  grain  exchange  has  never 
closed  its  doors  on  a  single  business  day. 
Here  indeed  do  we  find  a  wide  continuous 
market. 

(2)  Stabilizes  Prices. — Future  trading, 
when  made  up  of  a  large  number  of  both 
hedging  and  speculative  transactions,  is  a 
great  stabilizer  of  prices.  This  has  been 
illustrated  in  the  preceding  pages  by  com- 
paring two  grains — wheat  and  oats — that 
enjoy  future  trading,  with  one  grain — bar- 
ley— that  did  not  enjoy  future  trading. 
Evidence  v^s  also  given  of  wheat  prices 
stabilized  by  future  trading  and  stabilized 
by  Government,  and  showing  which  meth- 


(^  CHICAGO  BOARD  OF  TRADE 

od  really  stablized.  In  the  next  chapter 
some  additional  evidence  will  also  be  given 
on  this  point  from  the  earlier  history  of 
this  country.  All  men  who  have  studied 
the  subject  carefully  for  years  now  are 
agreed  that  future  trading  stabilizes  prices. 

(3)  Enemy  of  Monopoly. — Speculation 
on  the  organized  exchanges  is  our  best  in- 
surance against  monopoly  in  the  grain 
trade.  Some  of  the  largest  grain  dealers  in 
Chicago — those  with  large  terminal  elevator 
facilities — admit,  in  private  conversation, 
that  their  interests  would  best  be  served  by 
abolishing  the  whole  Board  of  Trade.  Then 
the  trade  would  fall  into  the  hands  of  four 
or  possibly  five  large  firms  and  much  wider 
margins  could  be  taken.  It  is  a  significant 
thing  that  must  never  be  forgotten  that  the 
comparatively  late  organization  of  the  Oma- 
ha Grain  Exchange  (1904)  was  due  to  the 
fact  that. a  few  large  dealers  on  that  market 
had  a  combine  and  largely  dictated  local 
grain  prices  in  the  13  respective  districts 
into  which  they  had  divided  the  Nebraska 
territory;  and,  rightly  fearing  the  destruc- 
tion of  this  monopoly  by  an  organized  ex- 
change, they  resisted,  and  long  successfully 
resisted  the  organization  of  the  Omaha  ex- 
change. It  is  not  necessary  to  read  Tom 
WorralFs  book  on  "The  Grain  Trust  Ex- 
posed"; ask  any  farmers'  elevator  manager 
or  officer  in  Nebraska  who  has  been  in 
business  for  twenty  years,  for  confirmation 
of  these  statements  about  the  Omaha  mar- 
ket and  its  one-time  monopoly. 

(4)  Stability  of  Values.— The  favorite 
banking  paper  in  the  Northwest  is  "grain 
paper,"    provided    it   represents    grain     in 


CHICAGO   BOARD  OF  TRADE  ()^ 

warehouses  and  hedged  in  the  pit.  It  is  this 
future  trading  (hedging  and  speculation  to- 
gether) which  gives  stabihty  to  values  and 
safety  to  all  investments  connected  with 
grain. 

shorthill's  testimony. 

J.  W.  Shorthill,  secretary  of  the  Nebras- 
ka Farmers'  Co-operative  Grain  and  Live- 
stock Association — the  best  known  man  in 
the  farmers'  elevator  movement — gave  his 
opinion  on  speculation  and  future  trading 
before  the  i8th  annual  convention  of  the 
Association  at  Omaha,  November  17,  1920, 
in  part  as  follows  : 

''Should  Congress  regulate,  or  curb,  or 
even  prohibit  "future  trading"  in  grain  it 
would  not  increase  the  price  of  your  wheat 
one  penny.  You  would  get  less  without  it 
than  you  do  with  it.  And  you  are  thinking 
right  now  that  this  is  a  sensational  thing 
for  me  to  say  to  you  and  that  I  am  not  on 
your  side  of  the  question  at  all.  You  can 
find  plenty  of  people  who  will  tell  you  that 
this  talk  is  not  on  your  side  of  the  question, 
but  regardless  of  all  that,  I  must  tell  you 
what  I  know.  During  the  war,  for  the 
greater  part  of  the  time,  we  had  no  real 
future  markets.  Take  corn,  for  instance. 
There  was  a  future  market  on  corn  but  it 
was  a  curbed  market ;  the  dealings  were  lim- 
ited and  regulated;  the  cash  market  was 
free;  that  destroyed  the  relation  between 
the  two.  The  result  was  that  right  here  in 
the  Omaha  market  corn  was  handled  on  a 
margin  of  from  10  to  12  cents  a  bushel  as 
against  a  margin  of  from  i  to  2  cents  in 
normal  times  and  under  a  hedging  market 
that  was  free.    That's  what  the  regulation 


6S      CHICAGO  BOARD  OF  TRADE 

of  the  future  corn  market  cost  you — from 
8  to  10  cents  a  bushel. 

"But  it  may  be  urged,  in  fact  it  has  been 
urged,  that  short  seUing  of  grain  futures 
will  depress  the  farmers'  market  more  than 
the  margin  I  have  mentioned  will  amount 
to — that  short  selling  depresses  the  market 
at  the  will  of  the  sellers.  It  has  been  said 
that  large  quantities  of  wheat  were  sold 
early  in  the  season  for  export  at  a  high 
price  and  later  bought  in  at  a  lower  price, 
and  that  is  true.  It  is  also  true  that  the 
farmer  did  not  get  to  sell  his  grain  on  the 
same  basis  on  which  it  was  sold  for  ex- 
port. He  was  forced  to  sell  it  on  a  lower 
basis.  But  one  thing  is  certain,  and  you 
will  agree  that  it  is  reasonable,  and  that  is 
that  the  farmer  who  has  sold  his  wheat 
got  more  for  it  than  he  would  have  received 
had  no  one  sold  short  on  wheat  for  export 
early  in  the  season.  Every  man  who  sells 
short  forces  himself  into  the  position  when 
he  sells  that  will  compel  him  at  some  time 
to  be  a  buyer  and  it  very  often  happens 
that  those  sold  short  in  a  market  become 
the  only  sustaining  influence  the  market 
has.  That  is  exactly  what  has  happened  in 
the  wheat  market  on  this  crop  and  without 
it  the  declines  would  have  been  more  vicious 
than  they  have  been ;  the  market  came  down 
slower  than  it  otherwise  would  have  come 
down.  That  is  exactly  what  did  happen  in 
the  corn  market  I  have  mentioned  because 
limits  were  placed  on  short  sales.  And 
because  Japan  has  the  only  securities  mar- 
ket in  the  world  that  does  not  permit  short 
selling  she  had  to  close  that  market  during 
the  war,  and  after  having  been  closed  for  a 


CHICAGO  BOARD  OF  TRAd£       69 

time  and  again  opened  for  a  time,  it  was 
a^ain  closed  and  so  remains." 


70       CHICACX)  BOARD  OF  TRADE 


CHAPTER  5. 

SOME    GRAIN    TRADE    HISTORY. 

WHATEVER  may  be  said  about  the 
theory  of  future  trading  and  its  in- 
fluence in  lessening  price  fluctuations, 
facts  are  called  for  to  prove  this  contention. 
What  concrete  evidence  can  be  added  to 
that  already  given  in  the  preceding  pages? 
The  Chicago  Board  of  Trade  was  organized 
in  1848,  but  future  trading  did  not  fully  de- 
velop till  after  the  Civil  War.  We  may 
therefore  compare  price  fluctuations  in 
wheat  over  a  long  period  of  years,  before 
future  trading  was  established,  with  wheat 
price  fluctuations  over  a  long  period  of 
years  after  future  trading  was  established. 
In  the  second  place,  turning  to  the  period 
when  we  had  no  future  trading,  we  may 
take  a  typical  year,  free  from  panics  or 
wars,  and  compare  price  fluctuations  from 
day  to  day  with  present  price  fluctuations 
under  present  future  trading  conditions. 
And  what  will  such  evidence  show  ?  Let  uf. 
examine  each  case  separately. 

(i)  One  Hundred  Years  of  Wheat 
Prices. — By  turning  to  the  tables  kept  at 
the  office  of  the  Van  Renssalaer  Manor  at 
Albany,  we  may  find  the  price  of  wheat  or 
the  first  day  of  January  for  each  year  fol 
sixty  years,  that  is,  from  1793  to  1852. 
Then  turning  to  the  Chicago  Board  ol 
Trade  reports,  we  may  find  the  price  of 
wheat  on  the  first  business  day  of  the  yeal 
for  forty  yeats — that  is,  from  1874  to  1913. 
Both  periods  are  therefore  comparatively 
free  from  wars.     Both  periods  saw  major 


CHICAGO  BOARD  OF  TRADfi  ^t 

financial   panics.     And  liere   is  what   the 
figures  show : 

Price  ranges  for  lOO  years — sixty  years 
without  future  trading,  forty  years  with 
future  trading. 

Without  Future  Trading—    Low.     High.  Range. 
First  20  years,  1793-1812.. $0.75      $2.00      $1.25 
Second  20  years,  1813.1832.     .75       2.25       1.50 
Third  20  years,  1833-1852.     .93%    2.25       1.31U 
Average  for  20-year  period,  $1.35. 
With  Future  Trading- 
First  20  years,  1874-1893.  .$0.72V8  $1.32%  $0.60y« 
Second  20  years,  1894-1913     .53y8    1.21>4      .68% 
Average  for  20-year  period,  $0.65. 
Or,  put  in  other  words,  the  fluctuations 
were  more  than  twice  as  large  in  the  days 
when  there  was  no  future  trading. 

The  complete  statistics  put  in  the  form  of 
a  graph  are  as  follows  (Chart  s)  : 

(2)  Typical  Year  Without  Future 
Trading.— The  year  1855  may  be  taken  as 
a  year  free  from  panics,  and  a  typical  year 
on  the  Chicago  market  when  there  was  no 
future  trading.  It  represents  the  typical 
narrow  market  with  few  speculators  and 
big  fluctuations.  Taking  the  "top  price"  of 
spring  wheat  on  this  market  for  the  months 
from  March  to  November,  inclusive, ,  we 
find  fluctuations  as  follows : 

CHICAGO   WHEAT   MARKET  IN    1855. 
(No    future    trading.) 

Low.  High.  Range. 

March     $1.20  $1.35  $0.15 

April      l-tX  \il  25 

Ma  V             1-50  1.75  .f'J 

June   ".    :                  1-55  1.73  .18 

Jufy    .:. 1-00  1.55  .55 

Aug-ust     1-00  1-^^  'll 

September 1-05  1.30  .25 

October 1.28  1.50  .22 

November    1.4o  1.53  .m 

Total  range   for  nine   months    Wa'o"^^'11 

Average   range   per   month ^4.8   cents 


72 


CHICAGO  BOAHD  OF  TRADE 


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Chart  5. 

One  Hundred  Years  of  Wheat  Prices,  arranged 
in  20-year  periods.  Compare  price  fluctuations. 
I.,  II.,  III.  60  years  with  no  organized  exchanges. 
IV.  and  V.  40  years  with  organized  exchanges. 


CHICAGO   BOARD   OF   TRADE  J^ 

Avr.RAGr.  :mo>:ttilv  range,  1855. 

In  other  words,  the  average  monthly 
range  was  24.8  cents,  which  may  be  com- 
pared with  the  average  monthly  range  for  a 
period  of  34  months  preceding  our  entrance 
into  the  World  War  of  6.2  cents. 

The  statistics  for,  the  nine  months'  period 
expressed  in  the  form  of  a  graph  are  as  fol- 
lows (Chart  6)  on  next  page: 

'The  development  of  the  system  of 
grading  and  of  elevator  receipts  is  the  most 
important  step  in  the  history  of  the  grain 
trade,"  says  H.  C.  Emery,  the  world's  great- 
est authority  on  this  subject.  The  Chicago 
Board  of  Trade,  in  pursuing  a  policy  ol  en- 
lightened self-interest,  contributed  more 
than  any  other  one  factor  to  the  growth  of 
a  standard  weighing,  inspection  and  grading 
system  for  grain.  Even  modern  countries 
in  Europe,  such  as  Germany,  handling  vast 
quantities  of  cash  ^rain,  have  not  worked 
put  a  grading  system  that  approaches  in 
efficiency  our  system.  Indeed,  sack  handhng 
and  selling  by  sample  is  still  comm^on  in 
many  large  European  cities,  in  place  of  the 
better  and  cheaper  method  of  bulk  handling 
and  selling  on  grades.  In  the  course  of 
time  the  State  of  IlHnois,  in  common  with 
other  States,  took  over  the  function  of 
grading  grain.  Finally,  the  federal  govern- 
ment, itself  estabhshed  uniform  grades,  for 
the  sake  of  the  better  handling  of  interstate 
and  foreign  shipments.  But  the  State  of 
Illinois  left  intact  the  weighing  department 
of  the  Chicago  Board  of  Trade,  the  official 
weights  of  which  are  now  accepted  as  stand- 
ard by  all  railroads  and  by  all  grain  dealers. 
The  State  of   Illinois,  in  taking  over  the 


74 


CHICAGO  BOARD  OF  TRADE 


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V/V»eat  Prices,  Chicago  Board  of  Trade.    Year 
'*b{f^  'before  Future  Trading  was  in  use.) 


CHICAGO  BOARD  OF  TRADE       75 

grading  of  the  grain,  did  in  fact  substan- 
tially preserve  the  Board  of  Trade  grades. 
With  very  little  change  they  are  now  re- 
flected in  the  federal  grades.  This  chapter 
in  the  Board  of  Trade  history  is  one  of 
great  importance  to  the  welfare  of  our  grain 
growers  and  grain  dealers  but  it  is  not  one 
which  receives  much  notice  from  public 
speakers. 
Germany's  experience  with  future 

TRADING. 

What  would  happen  if  our  governrnent 
should  pass  a  law  prohibiting  "speculation" 
on  the  grain  exchanges?  The  same  thing, 
no  doubt,  which  happened  in  Germany  when 
the  Reichstag  passed  a  law  in  1896  abol- 
ishing future  trading  in  grain.  The  farmers 
were  strongly  organized  and  had  enough 
political  power  to  put  the  law  on  the  statute 
books.  It  was  administered  with  great  effi- 
ciency. The  farmers'  party  was,  however, 
finally  convinced  of  their  mistake  in  passing 
the  law.    It  had  the  following  results : 

(i)  It  increased  price  fluctuations  in- 
stead of  lessening  them. 

(2)  One  class  of  business  men — com- 
mission men — were  wholly  driven  off  the 
Berlin  market.  The  so-called  small  dealer 
was  in  nearly  every  case  also  driven  off  the 
market,  leaving  the  business  in  the  hands  of 
fewer  and  richer  men. 

(3)  Dealings  in  futures  were  found  to 
be  not  only  necessary  but  indispensable  to 
dealers,  importers,  exporters  and  millers  for 
the  avoidance  of  speculation  in  grain. 

(4)  With  the  abolition  of  futures  it  be- 
came impossible  to  establish  fixed  standard 
prices,  while  prices  which  were  made  by 


y(>  CHICAGO   BOARD  OF  TRADE 

secret  transactions  were  not  of  best  service 
to  the  farmers. 

(S)  Finally,  the  law  was  of  great  benefit 
to  one  class — the  interior  dealers,  who  paid 
the  farmers  less  and  charged  the  consumers 
more. 

To  summarize:  The  grain  was  handled 
on  wider  margins;  the  farmers'  price  was 
lowered;  the  consumer  was  not  benefited; 
and  price  fluctuations  were  increased. 

So  the  law  was  repealed  after  four  years 
of' vigorous  enforcement.  It  took  the  farm- 
ers' party  four  years  to  learn  its  lesson.  The 
Germans  went  back  to  the  system  of  future 
trading  used  on  the  leading  American  grain 
exchanges. 

THE    KANSAS    WHEAT    PRICE   AND   THE    CON- 
SUMER'S DOLLAR. 

The  federal  government  made  a  report  on 
"Price  of  Wheat  to  Producers  in  Kansas" 
in  1914  (63d  Congress,  3d  Session,  House 
Document  1271),  and  traced  the  wheat 
from  the  farm  to  the  Liverpool  buyer.  Re- 
ducing the  figures  to  the  basis  of  100  per 
cent,  it  was  found  that  the  farmer  received 
75  cents  of  the  Liverpool  importer's  dollar. 
Expressed  in  the  form  of  a  table,  the  fig- 
ures are  as  follows : 
When  Liverpool  price  was  $1  a  bushel —     - 

Cts.per  bu 
Price  received  by  farmer  in  Kansas ...       75 

Margin  taken  by  country  elevators 2.5 

Freight  to  seaboard   12.6 

Freight,  ocean  passage    5.0 

Expense  of  elevating,  loading,  etc 1.9 

Interest  and  insurance  0.8 

Shipper's   profits    1.1 

Exporter's  profits   '        1.1 

100 


CHICAGO  BOARD  OF  TRADE  "JJ 

The  government  says,  in  summarizing 
this  report: 

**The  cost  of  transportation  is  by  far  the 
largest  element  in  the  cost  of  marketing 
wheat.  Of  the  total  difference  between  the 
farm  price  and  the  Kansas  City  price, 
freight  accounts  for  approximately  65  per 
cent.  Of  the  spread  between  the  farm  price 
and  the  Liverpool  price,  railroad  and  ocean 
freights  account  for  approximately  70  per 
cent. 

"The  weakest  link  in  the  chain  of  market- 
ing Kansas  wheat  is  the  country  elevator. 
Compared  with  the  value  and  difficulty  of 
service  rendered,  the  margin  taken  by  the 
country  elevator  is  perhaps  larger  than  that 
taken  by  any  other  middleman  in  the  mar- 
keting of  wheat.  One  special  weakness  is  in 
the  failure  to  use  the  future  market  to 
hedge  holdings.  Elevators  frequently  be- 
come congested  with  unhedged  grain." 

(Note. — Country  elevators  of  the  Northwest 
very  commonly  hedge  their  purchases.  Country 
elevators  in  Kansas  quite  generally  do  not  hedge. 
However,  it  must  be  borne  in  mind  in  this  con- 
nection that  over  half  the  Kansas  wheat  is  milled 
within  the  State  at  a  nearby  mill,  and  these  Kan- 
sas flour  mills,  particularly  the  large  ones,  do 
hedge  this  wheat.  It  will  be  noted  from  the  above 
official  report  that  no  other  farm  crop  caq  show 
such  low  costs  of  handling.  This  is  what  organ- 
ized speculation  means.) 

THE  FUTURE  PROBLEM. 

How  shall  speculation  be  lessened  ?  How 
shall  prices  be  stabilized  ?  This  problem  in- 
volves three  separate  but  related  problems, 
namely : 

( 1 )  How  finance  the  grain  movement  ? 

(2)  How  provide  adequate  storage  and 
where  ? 


78       CHICAGO  BOARD  OF  TRADE 

^  (3)    How  secure  adequate  transportation 
with  no  car  shortages? 

(4)  How  provide  more  orderly  market- 
ing throughout  the  52  weeks? 

Organized  exchanges  should  prove  the 
greatest  help  in  solving  these  problems — as 
they  have  proved  in  the  past. 


CHICAGO  BOARD  OF  TRADE       7$ 


APPENDIX. 

MINNESOTA    STATE   LEGISLATURE,    1919. 

Senate  File  No.  20  and  Senate  File  No.  381, 
introduced  by  Hon.  F.  H.  Peterson. 

RESOLUTION,  Adopted  by  the  Farmers  Grain 
Dealers'  Association  of  Minnesota,  in  convention 
assembled  at  Minneapolis,  February  18-19-20,  1919. 
WHEREAS,  There  is  under  consideration  by 
the  Minnesota  State  Legislature  at  present  Senate 
File  No.  20  and  also  Senate  File  No.  381  (the 
latter  being  a  correction  of  Senate  File  No.  20) ; 
and 

WHEREAS,  These  bills  proposed  to  completely 
destroy  all  speculative  trading  in  grain  for  future 
delivery  in  the  State  of  Minnesota,  at  the  same 
time  pretending  to  permit  purchases  and  sales  of 
grain  for  future  delivery  as  hedges;  and 

WHEREAS,  This  bill  would  destroy  future 
trading  in  the  State  of  Minnesota  and  would  de- 
prive the  farmers'  elevator  companies,  country 
millers,  etc.,  in  Minnesota  and  the  Dakotas  of  the 
opportunity  of  hedging  their  purchases  of  grain 
in  Minneapolis  or  Duluth,  forcing  them  to  assume 
the  speculative  risk  which  they  now  avoid  through 
hedging  sales  for  future  delivery  in  these  mar- 
kets, or  it  would  force  them  to  hedge  their  pur- 
chases of  grain  in  Chicago,  Milwaukee,  Kansas 
City,  St.  Louis  and  other  markets,  in  which  they 
would  not  be  able  to  make  delivery,  these  hedging 
operations  being,  of  course,  very  much  more  dan- 
gerous, and  being  in  fact  unsafe  hedges  on  ac- 
count of  the  inability  to  deliver  the  grain  hedged 
in  the  markets  where  the  hedges  are  placed;  and 
WHEREAS,  By  destroying  future  trading  m 
the  State  of  Minnesota  the  effect  would  be  to 
greatly  injure  the  market  places  at  Duluth  and 
Minneapolis,  in  which  the  spring  wheat  producer 
of  the  Northwest  must  market  his  grain,  with  the 
result  that  since  the  flour  mills  and  linseed  oil 
mills  of  Minnesota  would  be  at  such  a  great  dis- 
advantage compared  with  the  flour  mills  and  oil 
manufacturers  of  other  states,  the  result  must 
necessarily   be   to    lower    the    price   of    grain   at 


8o       CHICAGO  BOARD  OF  TRADE 

Minneapolis  and  Duluth,  as  compared  with  other 
markets,  on  account  of  the  increased  risks  which 
must  be  assumed  by  farmers'  elevator  companies, 
line  elevator  companies,  terminal  elevators,  millers, 
linseed  oil  manufacturers,  etc.;  and 

WHEREAS,  The  legislature  of  the  State  of 
Minnesota  should  not  strike  down  or  injure  tb'j 
market  places  in  its  own  State  and  the  result  of 
the  passage  of  such  a  law  would  be  to  drive  busi- 
ness to  other  markets  in  other  States,  such  as 
Chicago,  St.  Louis,  Kansas  City,  Milwaukee,  ~ 
etc.;  and 

NOW,  THEREFORE,  BE  IT  RESOLVED 
BY  THE  FARMERS'  GRAIN  DEALERS' 
ASSOCIATION,  in  convention  assembled,  that 
Senate  Files  No.  20  and  No.  381  are  against  the 
best  interests  of  the  farmers  and  farmers'  ele- 
vator companies  of  the  State  of  Minnesota. 

AND  BE  IT  FURTHER  RESOLVED,  That 
the  officers  of  the  Farmers'  Grain  Dealers'  Asso- 
ciation forward  a  copy  of  this  resolution  to  each 
member  of  the  Minnesota  Senate  and  House  of 
Representatives,  requesting  them  to  oppose  with 
all  their  influence  the  passage  of  Senate  Files 
No.  20  and  No.  381. 


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